© Reuters. FILE PHOTO: Experts work on cranes in front of the European Central Bank (ECB) in Frankfurt
By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) – The European Central Bank will keep policy unchanged on Thursday, emphasizing that its stimulus measures are keeping the pandemic economy alive, so they don’t should withdraw too soon.
The bank is pinning borrowing costs near record lows through large bond purchases to see the euro zone weather a recession that leaves schools, shops, restaurants and hotels on board. closed for one year.
ECB director Christine Lagarde is likely to argue that it will only take a little more time before the economy booms again after a pandemic hibernation and the bank needs to be adamant with its gun because it is more costly to leave the army too early than to stop too late.
Many ECB watchers see Thursday’s meeting as a placeholder, paving the way for June, as policymakers have to decide whether or not to slow down their bond purchases even if it does. that means higher borrowing costs.
“ECB could be done easily this Thursday,” said Berenberg economist Holger Schmieding. “The economy and inflation are on the right track, with favorable financial conditions and stable markets.”
In March, the ECB agreed to step up its bond purchases, and most policymakers who have spoken since have been pleased with stopping the increase in borrowing costs in financial markets, with some Inflation-adjusted yields even tend to be lower due to bank intervention.
But at the current rate, the ECB is likely to expire the purchase quota before it is expected to end in March next year, so their June decision will be an important signal as to whether The 1.85 trillion euro (2.22 trillion USD) Pandemic Emergency Purchasing Program (PEPP) is likely to ease early next year.
Dutch policymaker Klaas Knot, one of the most conservative members of the Board of Governors, has said that starting to reduce purchases from June could be feasible, even if others give. Up to now have rejected this idea, saying that small talks were coming up soon. deadly third wave of COVID-19.
Even if growth was fragile and the lockout had previously been unintended, there was plenty for Lagarde to cheer on.
The current pandemic wave appears to have stopped in Europe, vaccination rates are accelerating, and the European Union’s 750 billion euro recovery fund has addressed an important judicial challenge.
Companies are also showing flexibility in adapting to life under sanctions, and governments are adding fiscal support measures, ensuring that companies stay afloat.
All of this suggests a quick recovery as immunity levels rise, which will leave the ECB in a policy dilemma sooner or later.
The Bank has promised “favorable” financing conditions and bought more bonds during the “urgent” period of the pandemic.
But neither of these terms was identified, leaving investors predicting how it reacted to the eventual rebound.
Once the rebound takes place and the ECB cuts down on bond purchases, the key question will be a guaranteed yield increase and how the bank can avoid the impression of micro-yield management.
“The challenge for the ECB will be to ensure that slowdowns from June are not seen as a change to the ECB’s response function, and instead seen as a response to improvement. in the economic context, “BNP said in a note to clients.
The ECB will make its policy decision at 11:45 GMT followed by Lagarde’s 12:30 GMT press conference.
With the unchanged policy, the deposit rate of ECB is said to remain negative at 0.5% and the main interest rate to be stable at 0%.
(1 dollar = 0.8328 euros)