The growth and inflation projections for the European Union was raised by the European Central Bank but also promised to hold the steady flow of stimulus over the summer as it fears that a retreat from the strategy at this moment would hasten up a rise in borrowing costs and slow down the recovery from the pandemic hit.
It would buy bonds at a “significantly higher” pace compared to the early months of the year, the ECB said even though it has already bought up most of the new debt issued by euro zone governments. This pledge of the ECB was being expected by most analysts.
“We believe that the steady hand is actually the right response,” ECB President Christine Lagarde told a news conference. She also stressed that the policy makers had not discussed about tapering, exiting or transitioning away from the 1.85 trillion euro Pandemic Emergency Purchase Programme.
There were however reports that at least three of the 25 members of the Governing Council of the central bank pushed to reduce the pace of PEPP arguing a better outlook for growth and inflation.
While acknowledging some debate around the decision, Lagarde said there was broad majority support for “significantly higher” bond buys.
The 19-country euro zone has relied on copious ECB money printing to finance ballooning government deficits, leaving it especially vulnerable to any curbing of stimulus.
The ECB has bought around 80 billion euros worth of debt per month under its Pandemic Emergency Purchase Programme (PEPP) this quarter, up from around 62 billion euros in the first quarter.
Policy makers still have some leeway in adjusting bond buys, particularly during the summer months when typically there is a fall in liquidity because of the latest decision of the ECB.
“We expect the situation to look different at the next joint assessment of financing conditions and the inflation outlook in September, when vaccinations will be close to the 70% inoculation target and the recovery fund will be operational,” Morgan Stanley said.
“At that point we expect a reduction in purchases.”
PEPP would last until March 2022, the ECB also said, thus maintaining its long standing guidance. The bank also said that it still had the option of buying less than its purchase quota or to increase it as required in order to “maintain favourable financing conditions”.
The ECB raised most of its growth and inflation projections because of economies emerging from Covid-19 lockdowns and with the pace of vaccination picking up. It also declared risks to the outlook balanced as it gave up on its long standing guidance for downside risks.
He ECB now projects growth of 4.6 per cent for 2021 which was above the 4 per cent growth rate forecast by it in March this year. It also set a forecast of 4.7 per cent for 2022 compared to its last projection of 4.1 per cent.
“We are far away from our ultimate aim. We are certainly not where we would like to be once the pandemic is over,” Lagarde said.
(Adapted from Reuters.com)