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'Patient' ECB vows longer support as virus risks grow

·3-min read
The European Central Bank unveiled a "forward guidance" statement that will provide investors with information about future moves on interest rates and bond purchases

European Central Bank chief Christine Lagarde on Thursday warned of growing economic "uncertainty" caused by the fast-spreading Delta variant of the coronavirus, as the bank pledged to keep support for the eurozone in place for longer.

"The euro area economy is rebounding strongly," Lagarde said.

"But the pandemic continues to cast a shadow, especially as the Delta variant constitutes a growing source of uncertainty."

The highly contagious variant -- which has forced renewed restrictions in several countries -- could dampen the recovery "in services, especially in tourism and hospitality," she added.

Lagarde said the ECB would show "patience" in helping the 19-nation currency club through the health crisis, signalling that key interest rates would stay lower for longer.

Thursday's meeting of the ECB's 25-member governing council was the first since the bank unveiled a new inflation target of two percent, ditching the previous goal of "close to, but below two percent".

In a revamped "forward guidance" statement released after the meeting, closely scrutinised by markets for hints on future policy moves, the ECB said rates would stay at record-low and even negative levels until inflation is seen "durably" reaching the new target.

Governors also made no tweaks to their 1.85-trillion-euro ($2.2 trillion) pandemic emergency bond-purchasing programme (PEPP), the bank's main tool to counter the virus impact.

The ECB's ultra-loose monetary policy measures are aimed at keeping credit cheap in the eurozone to encourage spending and investment.

Lagarde said the "easier to understand", updated guidance underlined the ECB's "commitment to maintain a persistently accommodative monetary policy stance".

ING bank economist Carsten Brzeski was underwhelmed however, calling the new language from the ECB "old wine in new bottles".

- German worries -

Some disagreement has emerged among ECB governors about when to start weaning the euro area off the massive stimulus.

But concerns about the increase in coronavirus infections appears to have hit pause on the debate, with Lagarde saying "none of us would want to tighten prematurely" and risk derailing the rebound.

She said the PEPP purchases will remain in place until at least the end of March 2022, or until the ECB "judges that the coronavirus crisis phase is over".

German Chancellor Angela Merkel earlier Thursday warned of "exponential growth" in Covid-19 infections, after a period of relatively low numbers allowed the country to ease curbs on hotels, restaurants, shops and other businesses.

- Surging prices -

During her press conference, Lagarde was grilled about the bank's new inflation target, which she has described as a more "simple" and "symmetric" goal, meaning the bank will allow inflation to temporarily overshoot or undershoot before stepping in.

The tweaked inflation goal is the main outcome of an 18-month strategic review at the ECB -- its first since 2003.

Eurozone inflation has been stubbornly low for years despite extraordinary stimulus efforts from the ECB.

But global consumer prices have surged in recent months, driven by one-off factors linked to the pandemic such as post-lockdown demand and supply chain bottlenecks.

Investors are on red alert over the price hikes owing to fears they could force policymakers to raise interest rates, hindering the post-Covid recovery.

Lagarde said the jump in eurozone inflation -- at 1.9 percent in June -- "is expected to be mostly temporary", and the ECB will look through it.

This would put the ECB on a different path than the United States, where the Federal Reserve is edging closer to a rate hike.

The ECB expects inflation in the euro area to hit 1.9 percent this year, before falling back to 1.4 percent in 2023 -- far from the bank's target.

"There is little doubt that the ECB will not hike rates before 2024," said Frederik Ducrozet of Pictet Wealth Management.

Analysts are now looking ahead to the next ECB meeting in September, when policymakers will have fresh growth and inflation forecasts.

mfp/dlc/wai

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