ECB meets as virus woes weigh on eurozone

Frankfurt am Main (AFP) – European Central Bank governors meet Thursday to take stock of their monetary stimulus efforts as more infectious strains of the coronavirus and stricter shutdowns cloud the economic outlook.

Policymakers are expected to stop short of taking fresh action after ramping up their pandemic support for the eurozone last month.

But observers will be scrutinising ECB chief Christine Lagarde’s words for hints of concern about the virus resurgence and the recent strength of the euro against the dollar.

The Frankfurt institution “will want to stay on the sidelines for as long as possible,” ING bank economist Carsten Brzeski said.

“The short-term path of the eurozone economy will be determined by the virus, vaccines, lockdowns, and fiscal stimulus, not additional monetary stimulus.”

The emergence of more contagious virus variants in Britain and South Africa has fuelled fears of a possible surge in outbreaks, at a time when many countries are already struggling to bring down Covid-19 cases.

Europe’s top economy Germany this week extended its partial lockdown until February 14, while France and Spain have tightened evening curfews.

A sluggish start to vaccination drives in the European Union is also expected to drag on the recovery in the first quarter of 2021.

The ECB in December forecast 3.9 percent growth for 2021, after an estimated contraction of 7.3 percent in 2020.

Lagarde recently said she had “no reasons to believe our forecast is wrong at this point”.

But it would become “a concern”, she said, if member states had to extend their shutdowns beyond March.

– Unprecedented –

Under former French finance minister Lagarde, the ECB has taken unprecedented steps to cushion the economic blow from the pandemic in the 19-nation euro area, and stressed it stands ready to do more as needed.

Its main tool is a massive pandemic emergency bond-buying scheme, known as PEPP, that was bulked up last month to total 1.85 trillion euros ($2.2 trillion).

The scheme, aimed at keeping borrowing costs low to encourage spending and investment, was also prolonged until March 2022.

Also in December, the ECB announced more ultra-cheap loans for banks, with rates getting more attractive the more they lend on to the real economy.

Interest rates are likely to hold steady at record lows on Thursday, observers say, and no tweaks are expected to the ECB’s pre-pandemic purchases of government and corporate bonds to the tune of 20 billion euros a month.

As with PEPP, the purchases are meant to keep credit flowing in a bid to bolster growth and drive up inflation.

But eurozone inflation has stayed stubbornly low for years and even turned negative in 2020.

– ‘Close attention’ –

By the ECB’s own estimates, price growth will gradually inch up to 1.4 percent by 2023, still far off the bank’s target of just under two percent.

In December, inflation stood at minus 0.3 percent.

Analysts say inflation could bound higher later this year, powered by pent-up consumer demand once lockdowns start easing, particularly in travel and dining out.

But any boost is likely to be short-lived, they cautioned.

Complicating the ECB’s efforts is the appreciation of the euro, which has risen by more than 10 percent against the greenback since late February.

“The currency remains a concern for the ECB as it could add to deflationary pressures and hurt the recovery,” said HSBC economist Fabio Balboni.

A stronger euro makes imports cheaper, keeping the lid on consumer prices, while exports become less competitive, hurting growth prospects.

Minutes of the last ECB meeting showed that the 25-member governing council was paying “close attention” to the exchange rate.

Nevertheless “the euro has not reached a level where the ECB would step in,” said Berenberg bank analyst Florian Hense.

“An interest rate cut in response to a stronger euro still seems like a very long shot.”