Surging inflation, economic rebound test ECB’s mettle

8 June, 2021 12:00 AM printer

FRANKFURT: Surging inflation and an economic rebound as virus curbs ease will be in focus when European Central Bank policymakers meet Thursday, testing their commitment to keeping pandemic-era stimulus measures in place.

The ECB’s 25-member governing council is widely expected to hold interest rates at historic lows and leave its massive bond-purchasing schemes unchanged at the upcoming meeting, reports AFP.

But with a brighter outlook on the eurozone horizon as more people are vaccinated and businesses reopen, observers will be eager for clues on when the ECB might start winding down, or “tapering”, its crisis bond buys.

The ECB’s 1.85 trillion euro ($2.2 trillion) pandemic emergency bond-purchasing programme (PEPP), its main weapon in the fight against the virus fallout, is set to run until March 2022.

ECB president Christine Lagarde’s Thursday press conference will likely be a tightrope walk between striking an upbeat tone about the region’s recovery while stressing the need for ongoing support, observers said.

Lagarde will try to avoid “the T-word”, according to ING bank economist Carsten Brzeski.

“Even if economic developments would in our view clearly justify at least having a first tapering discussion, the sheer mention of such a discussion could push up bond yields further and consequently undermine the economic recovery,” he said.

A similar debate is raging in the United States, where minutes from the Federal Reserve meeting in late April showed that some officials believe the US economy may soon be healthy enough to start trimming asset purchases.

Italian central bank governor Ignazio Visco gave a hint of the ECB’s thinking last week when he said that “uncertainty over the timing and the strength of the recovery require that financial conditions remain supportive for a long time.”

Central banks’ huge monthly bond purchases are aimed at keeping borrowing costs low to spur spending and investment.

On top of PEPP, the ECB is also hoovering up 20 billion euros a month in government and corporate bonds under a pre-pandemic scheme to boost growth and drive up inflation.

The Frankfurt institution has also offered ultra-cheap loans to banks and set its bank deposit rate at minus 0.5 percent—meaning lenders pay to park excess cash at the ECB.

The ECB’s goal is to push inflation “close to, but below” two percent, a target that has been out of reach for years.

But consumer prices have risen rapidly in recent months, driven by soaring energy prices and temporary factors including a shortage of semiconductors and pent-up demand as different sectors exit shutdowns.

Inflation in the 19-nation euro area hit 2.0 percent in May, overshooting the ECB’s benchmark to reach its highest level in nearly three years.


Top