ECB to dangle stimulus on strong euro, virus woes

FRANKFURT AM MAIN: European Central Bank chief Christine Lagarde may hint at more stimulus to come Thursday as concerns over a coronavirus resurgence and a stronger euro add to economic uncertainty.

As expected, ECB governors made no changes to the bank's ultra-loose monetary policy at their latest meeting, once again held online because of coronavirus restrictions.

They kept interest rates at record lows and made no changes to their 1.35-trillion-euro ($1.6-trillion) pandemic emergency bond-buying scheme, aimed at keeping borrowing costs low to steer the eurozone through the virus-induced downturn.

The scheme, known as PEPP, is set to run "at least" until the end of June 2021 or until the ECB "judges that the coronavirus crisis phase is over", the central bank said in a statement.

Attention now shifts to Lagarde's 1230 GMT press conference in Frankfurt, where she will unveil the latest growth and inflation forecasts for the 19-nation currency club.

The eurozone economy shrank by a record 12 percent in the second quarter of 2020, but the bank's projections are expected to confirm that a rebound is already underway as lockdowns ease and public life restarts.

Lagarde is nevertheless expected to "stress the high level of uncertainty" ahead, ING bank analyst Carsten Brzeski said, as the region braces for an uneven and unpredictable recovery.

A recent uptick in coronavirus cases across Europe has stoked fears that hard-hit countries like Spain and France may impose renewed restrictions that could disrupt economic activity.

A flare-up in Brexit tensions has also caused alarm after Britain signalled it may renege on parts of its divorce deal with the European Union.

Adding to Lagarde's woes is a significant strengthening of the euro against the dollar in recent weeks.

While the ECB has no target for the euro-dollar exchange rate, a surging euro complicates its efforts to push up stubbornly low inflation and observers are keen to see how Lagarde will address the concerns.

Most analysts expect however that the ECB will wait until its December meeting to take fresh policy action, possibly by extending or increasing its PEPP stimulus.

"Ms. Lagarde will need to walk a tightrope, probably hinting that the ECB is monitoring the implications of euro appreciation for price stability, and that all tools can be adjusted as needed to meet the inflation mandate," Unicredit analysts said in a note.

The euro last week touched $1.20 for the first time since 2018, from $1.06 in March.

The surge is in part down to a stunning policy shift from the US Federal Reserve, which last month said it would allow inflation to accelerate to let the economy generate more jobs, causing the dollar to weaken against the euro.

Reporters are likely to grill Lagarde on whether the ECB might feel pressure to tweak its own inflation target as a result.

A stronger euro hurts exporters' competitiveness and makes imports cheaper, driving down consumer prices in the eurozone and making it harder for the ECB to reach its goal of pushing up inflation to "close to, but below" 2.0 percent.

Eurozone inflation even turned negative in August for the first time in four years, coming in at -0.2 percent, partly because of plummeting demand but also one-off factors like a temporary sales tax cut in Germany.

Deflation, or a spiral of falling prices, is a worry for policymakers because it can deter customers from spending in anticipation of even cheaper prices, creating pressure on businesses who may end up cutting jobs or closing down.

Analysts expect the ECB to nudge down its inflation forecasts through to 2022, setting the stage for more central bank support for the eurozone.

"In June, the ECB expected an inflation rate of 1.3 percent for 2022. Any downward revision will increase the likelihood of additional monetary stimulus," said Brzeski.