ECB leaves policy unchanged despite darkening economic outlook

ECB leaves policy unchanged despite darkening economic outlook

Central bank signals likelihood it will boost stimulus measures in December

The European Central Bank has left its monetary policy unchanged and decided not to inject more stimulus into the eurozone economy, despite a fresh surge in coronavirus infections triggering new restrictions on activity in some of the bloc’s largest economies.

The ECB kept its deposit rate at minus 0.5 per cent and held its emergency bond-buying plan at €1.35tn in its latest policy announcement on Thursday.

The bank said risks were “clearly tilted to the downside” and promised to carry out a “thorough reassessment of the economic outlook and the balance of risks” and to “recalibrate its instruments, as appropriate, to respond to the unfolding situation” at its next meeting in December.

In a clear signal that it is likely to inject more cheap money into the economy later this year, the central bank said it would “ensure that financing conditions remain favourable to support the economic recovery and counteract the negative impact of the pandemic on the projected inflation path”.

It said it would “carefully assess the incoming information, including the dynamics of the pandemic, prospects for a rollout of vaccines and developments in the exchange rate” — indicating the main factors that could sway its decision on whether to ease monetary policy further.

After the announcement, ECB president Christine Lagarde said there were “clear headwinds to the short-term outlook” after recent data indicated “a significant softening in economic activity in the final quarter of the year”.

She added that inflation was likely to remain negative until early next year because of low energy prices and a temporary German cut in value added tax, but she predicted that once the pandemic was contained, “a recovery in demand will put upward pressure on inflation of the medium term”.

The ECB’s decision comes a day before new figures are expected to show that the eurozone sank into its third consecutive month of deflation in October.

The gloomy pricing data on Friday will be accompanied by gross domestic product figures that are expected to reveal record growth of close to 10 per cent between the second and third quarters, the region bouncing back from a deep recession in the first half of this year.

But the outlook for the eurozone economy has darkened in recent days as countries including France and Germany reported record daily coronavirus infections and announced new restrictions on people’s social interaction and movements — including curfews and closures of bars, restaurants, leisure facilities and non-essential shops.

Andrew Kenningham, economist at Capital Economics, said the ECB had “clearly indicated its intention to provide more support in December”, adding: “With the region’s two biggest economies about to enter fresh national lockdowns, and others likely to follow suit, we would not rule out the possibility that the bank moves even before then.”

The partial lockdowns are not as strict as those imposed when the pandemic first hit Europe in March, with schools and factories being left open. But economists expect them to drag the economy into a fresh contraction, curtailing the rebound in output which occurred in the third quarter.

“The possibility of a double-dip recession cannot be ruled out yet, as the new restrictions being implemented across the euro area to curb the current resurgence of Covid-19 cases will again increase uncertainty for households, corporates and banks,” Kerstin af Jochnick, an ECB supervisory board member, said in a speech earlier on Thursday.