ECB holds rates as it assesses strength of pandemic recovery


The European Central Bank has left its monetary policy unchanged as it assesses whether the economic recovery from the coronavirus pandemic could be held back by a fresh surge in infections and the euro’s rise.

The eurozone’s central bank said it “continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner”.

The central bank kept its main deposit rate unchanged at minus 0.5 per cent and said its bond purchases would continue “as long as necessary to reinforce the accommodative impact of its policy rates”.

Speaking at the ECB’s press conference after the rate decision, its president Christine Lagarde said the central bank’s governing council would “assess incoming information, including developments in the exchange rate with regards to its implications for the medium-term inflation outlook”.

The manufacturing sector continues to recover but the services sector has seen momentum slow recently, Ms Lagarde said. Consumer demand is improving but remains hampered by the high level of uncertainty about the economic outlook, she added.

The bloc suffered a record postwar contraction of 11.8 per cent in the three months to the end of June, from the previous quarter.

On Thursday, the ECB revised its growth forecast for this year upwards slightly after the downturn proved marginally shallower than initially expected. 

The eurozone economy will contract 8 per cent over the course of this year, the ECB said — a slight improvement from its June forecast for a decline of 8.7 per cent. It forecasts a 5 per cent rebound next year.

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Its inflation forecasts were largely unchanged, except for 2021 when it raised its expectation for price growth slightly to 1 per cent.

While there are signs that the eurozone economy has begun to rebound strongly in the third quarter, economists fear that rising numbers of coronavirus infections, as well as the stronger euro, could weigh on the recovery.

The euro has risen 10 per cent against the dollar since the pandemic swept across Europe in March and is up about 4 per cent against a trade-weighted basket of currencies over the same period. Economists say a stronger euro is likely to make the region’s exports less competitive.

The US Federal Reserve’s announcement last month — that it would shift to a more dovish policy stance with a new average inflation target — prompted the dollar to fall further against the euro and led analysts to question how the ECB will respond. 

Most economists expect the ECB to expand its €1.35tn emergency bond-buying programme as early as December if inflation shows little signs of bouncing back from its recent lows towards its target of just below 2 per cent. Some analysts believe eventually it may also have to cut rates further into negative territory.



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