Europe warms to stimulus ahead of recovery

The European Central Bank is abandoning its major pandemic support for the economy as a whole, even as the economy shows signs of recovery due to fewer virus cases and fewer restrictions on activity in the 19 countries that use the euro currency. reasons appear.

FRANKFURT, GERMANY – The European Central Bank as a whole abandoned its major pandemic support for the ongoing economy, even as the economy showed signs of recovery with fewer virus cases and activity in the 19 countries that use the euro currency But due to less restrictions appear.

ECB President Christine Lagarde said after the decision was issued on Thursday that the bank expected “a major improvement” in the second quarter of the year. But she cautioned that the rebound “depends on the course of the pandemic and how the economy reacts once it reopens.”

Lagarde downplayed inflation, saying it was the result of temporary factors and rising energy prices. He said there is still a “significant economic slowdown”, which is holding back the underlying inflationary pressures.

The central banks of the 19 countries that use the euro said in their policy statement on Thursday that emergency bond purchases in the coming quarter will remain at a “significantly higher pace” than in the first three months of the year. The language, mirrored from its last meeting on April 22, changed to justify the higher pace of purchases by a quarter.

While economic activity is increasing, Europe is not expected to reach pre-pandemic levels of production before 2022, which lags far behind the US and China.

The ECB is buying about 85 billion euros per month in government and corporate bonds as part of a 1.85 trillion euro ($2.25 trillion) effort to last until at least the beginning of next year. The buying spree in March came amid higher number of vaccinations and higher COVID-19 cases.

Buying raises bond prices and lowers their interest yields, as price and yield move in opposite directions. This affects long-term borrowing costs throughout the economy, sending them lower.

That’s exactly what the bank wants at a time when many companies are grappling with low demand, high loans and the need to keep credit lines open so that they can get to the other side of the pandemic.

IHS Markit’s surveys of purchasing managers showed a sharp increase in activity in May, including in the hard-hit services sector. The index peaked at 57.1, with anything over 50 indicating expansion. Economic output figures were revised down to minus 0.3% from minus 0.6% in the first quarter; The ECB expects a strong rebound in the second half of the year and 4.0% growth for all of 2021.

Rising inflation also complicates the ECB’s message. Generally, rising prices prompt the central bank to withdraw its stimulus money. But in this case, ECB officials and economists say the recent high inflation figures are the result of temporary factors that would leave inflation below the ECB target.

Eurozone annual inflation reached 2.0% in May due to rising energy prices. The ECB’s target is lower, but closer to 2%. Comparisons with low energy prices during the pandemic year 2020 will soon be out of the data, however, post-pandemic inflation could be weaker than current figures might suggest otherwise.


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