European Central Bank expects to use full extent of stimulus

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Photo credit The European Central Bank is seen in Frankfurt, Germany, Thursday, Sept. 10, 2020. The governing council of the ECB will meet on Thursday. (AP Photo/Michael Probst)
By The Associated Press

FRANKFURT, Germany (AP) — European Central Bank head Christine Lagarde said the bank would “likely” use all of the 1.35 trillion euros ($1.6 trillion) in planned stimulus to support the economy through the pandemic, which has caused a massive recession and is seeing a new rise in contagions.

After the ECB left its key rates and stimulus settings unchanged on Thursday, Lagarde said that strong central bank support was still necessary given high uncertainty about the recovery from the pandemic lockdowns. She repeated the bank's promise to keep the central bank's pandemic emergency bond-buying program running through mid-2021 - and in any case until the coronavirus crisis phase is over.

Lagarde said the economy's return to health will mainly depend on countries' ability to contain the outbreak. The recent increases in infection rates are “headwinds to the short-term outlook” while “a further sustained recovery remains highly dependent on the evolution of the pandemic and the success of containment policies.”

After some initial success in reversing large outbreaks in Spain, Italy and France, and after Germany’s success in containing a disastrous first wave, cases in Europe have started to rise again as people have returned from summer vacations and after some restrictions were eased.

The pandemic stimulus still has some 850 billion euros left unused, so even with no action Thursday the eurozone economy will still see substantial central bank support. The program pumps newly created money into the economy in an effort to keep credit flowing to businesses and promote growth and stronger inflation nearer to the bank's goal of just under 2%.

The decision by the ECB's governing council to leave its policy programs unchanged was widely expected, but some analysts expressed surprise at the lack of hints that the bank was ready to add more. Many observers have been predicting the bank will add to its bond purchase stimulus by year end. Lagarde indicated the bank's governing council had not discussed expanding the bond purchase efforts.

She also struck a relatively confident tone on two other issues regarded by some as signs of potential trouble: the stronger euro, which can hurt exporters just as they try to recover from the pandemic, and the inflation rate's drop below zero to 0.2%, far from the bank's target. Weak inflation is often a sign of economic weakness.

Lagarde indicated the low inflation reading was due to temporary factors and she made only a mild comment on the stronger euro. She said bank officials would “carefully assess incoming information, including the exchange rate.” The euro rose after the statement and traded about a cent higher at $1.19.

Economist Florian Hense at Berenberg bank found it surprising that Lagarde “refrained from almost any signal whatsoever for more stimulus.”

Oliver Rakau at Oxford Economics said that the ECB “may have sounded too confident for its own good.” He said Lagarde's lack of concern about the euro could help lift the euro even further, causing trouble that would demand more action. “So we still think the ECB will end up expanding the pandemic emergency purchase program by 200 billion euros later this year," he wrote in a research note. "In fact, the ECB's nonchalance may push it to do more.”

The Fed, meanwhile, has shifted its 2% interest rate target to an average, meaning that it could maintain stimulus for a longer period of time by letting inflation run higher than the target. That pro-stimulus stance could weaken the dollar further against the euro

The economy of the 19 euro currency countries plunged 11.8% in the April-June period from the previous quarter. Activity is picking up quickly but isn’t expected to regain pre-virus levels before 2022.

The ECB is also making 20 billion euros in monthly bond purchases from a stimulus effort launched before the outbreak. Other stimulus includes cheap, long-term credit for banks to help them lend to businesses, and a negative rate penalty of 0.5% on deposits left overnight by commercial banks as an incentive for them to lend the money rather than let it pile up at the central bank.

European governments have made big economic efforts at the national level, paying companies to keep workers on and extending loans. That has kept unemployment in the eurozone down at 7.9%, thought the rate is likely to rise after those programs expire.

At the EU level, governments have agreed to fund a 750 billion-euro recovery fund supported by common borrowing. The money would be spent from 2021 on projects aimed at supporting growth, digitalization and transforming the economy to reduce emissions of carbon dioxide, the main greenhouse gas blamed by scientists for climate change.