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Markets

ECB paves way for December stimulus as lockdowns return

  • Based on its September forecasts, the ECB expects eurozone inflation to inch up to 1.3 percent by 2022, still far off the official target.
Published October 29, 2020

FRANKFURT AM MAIN: The European Central Bank signalled it stood ready to bolster its pandemic stimulus in December as surging coronavirus infections darken the eurozone's economic outlook.

With risks "clearly tilted to the downside", the ECB said it would use next month's updated growth and inflation forecasts to "recalibrate its instruments, as appropriate, to respond to the unfolding situation".

The promise of further action comes a day after France and Germany joined Italy and Spain in introducing fresh lockdown measures to halt a second Covid-19 wave, set to inflict more economic pain.

The ECB has rolled out a 1.35-trillion-euro bond-buying scheme to keep borrowing costs low and boost the economy, and many observers expect the scheme to be beefed up at the next monetary policy meeting in December.

As expected, ECB governors left the scheme, known as PEPP, unchanged on Thursday.

They also kept key interest rates at historic lows and maintained their ultra-cheap loans to banks, as well as a pre-pandemic asset-purchasing scheme to the tune of 20 billion euros a month.

Attention now shifts to ECB president Christine Lagarde's 13:30 GMT press conference, where observers will scrutinise her words for hints of which steps the bank could take next.

She previously told the French daily Le Monde that any economic recovery seen during the summer "now risks losing momentum" as new shutdowns across the continent hamper business activity.

She is also expected to reiterate calls for eurozone governments to share the load with more fiscal stimulus.

"The European Central Bank keeps its powder dry, but signals a clear willingness to act next month," said ING economist Carsten Brzeski.

Andrew Kenningham, an economist at Capital Economics, said the ECB might pull the trigger earlier than expected.

"With the region's two biggest economies about to enter fresh national lockdowns, and others likely to follow suit, we would not rule out the possibility that the bank moves even before then," he said.

The ECB's unprecedented monetary stimulus is aimed at bolstering economic growth and driving up stubbornly low inflation to its goal of "below, but close to two percent".

Eurozone inflation, however, stood at -0.3 percent in September after dropping into negative territory in August, raising the dreaded spectre of deflation in the 19-nation currency club.

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.

Inflation in Germany, Europe's top economy, on Thursday came in at -0.2 percent, the same rate as in September, dragged down by lower energy prices and a temporary sales tax cut.

Based on its September forecasts, the ECB expects eurozone inflation to inch up to 1.3 percent by 2022, still far off the official target.

The eurozone economy was expected to shrink by eight percent this year before rebounding to see five percent growth in 2021.

However, most analysts agree that the latest setbacks in the fight against the virus mean those forecasts are now outdated, with the fourth quarter of 2020 likely to be worse than expected.

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