European Central Bank holds interest rates, confirms further easing

Euro resumes gains before ECB decisions

European Central Bank president Christine Lagarde said the eurozone economy probably contracted at the end of previous year, meaning that the bloc now looks headed for a double-dip recession.

Lagarde said the ECB's forecasts "remain valid" for now, as they took into account lockdowns persisting through the first quarter coupled with a gradual start to vaccinations.

I would expect some trivial remarks about policymakers watching any advance in the euro rather closely but besides any potential verbal intervention, there shouldn't be much else to it as long as the euro doesn't rise too far, too fast.

Europe is on the verge of a double-dip recession as governments toughen restrictions on travel, leisure and non-essential shops to combat a surge in infections.

At a press conference shortly after the policy announcement, Lagarde said recent data confirmed "pronounced near term weakness in the economy" and said the eurozone was likely to have contracted in the final quarter of 2020.

The ECB in December forecast 3.9 percent growth for 2021, after an estimated contraction of 7.3 percent in 2020.

The former French finance minister also reiterated her plea for European governments to support the ECB's efforts through fiscal policy.

I would argue that she would adopt a similar stance as what Powell outlined last week, in that the European Central Bank will brush aside any likely temporary jump in inflation readings this year until there is more clarity that such pressures can be sustained in the long run.

Vistesen said the ECB's decision to increase stimulus last month, against the prevailing narrative, meant there was enough firepower on the table already. The governing council added €500 billion to its pandemic emergency stimulus bond purchases, bringing the total to €1.85 billion (US$2.2 trillion), and extended the regular purchases through to at least March 2022.

She urged European Union members to speed up the ratification of a recently agreed 750-billion-euro recovery fund, saying it had a "key role" to play in financing the region's bounce-back. The ECB left its key interest rate unchanged at minus 0.5%.

The goal of the measures is to keep borrowing costs low to encourage spending and investment in the 19-nation currency club, in a bid to boost growth and inflation.

First, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00 per cent, 0.25 per cent and -0.50 per cent respectively.

Uncomfortably low inflation is set to remain a thorn in the ECB's side for years to come, however, even if surging oil demand helps put upward pressure on prices in 2021.

The euro was up 0.3% against the dollar in the wake of the decision, to $1.214.

Complicating the ECB's efforts is the appreciation of the euro, which has risen by more than 10 percent against the greenback since late February.

A stronger euro makes imports cheaper, keeping the lid on consumer prices, while exports become less competitive, hurting growth prospects.

"The currency remains a concern for the European Central Bank as it could add to deflationary pressures and hurt the recovery", said HSBC economist Fabio Balboni.



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