Talk of tapering the European Central Bank’s emergency bond purchases is “simply premature”, according to Christine Lagarde, even though the bank’s officials are confident the eurozone economy will rebound strongly later this year.
Speaking at a press conference on Thursday after the ECB’s latest monetary policy decision, its president said: “We still have a long way to go for the economy to become sustainable . . . we have to cross the bridge of the pandemic and be able to walk on solid ground.”
In a statement after the meeting the central bank’s governing council said it had “decided to reconfirm its very accommodative monetary policy stance” and vowed to maintain the recently elevated pace of asset purchases.
The eurozone economy continues to suffer from the containment measures deployed to rein in the bloc’s high Covid-19 infection rates. But the pace of vaccinations has accelerated in many countries recently, fuelling economists’ hopes that restrictions may be eased next month, a move that many expect to trigger a sharp rebound.
Lagarde said: “Progress with vaccination campaigns and the envisaged gradual relaxation of containment measures underpin the expectation of a firm rebound in economic activity in the course of 2021.”
While the eurozone economy is likely to contract in the first quarter, it is expected to rebound with growth of 1.3 per cent in the three months to June, she said.
However an “ample degree of monetary accommodation” is still necessary and an “ambitious and co-ordinated fiscal stance” from eurozone governments “remains crucial”, she added.
European bond markets strengthened after the ECB decision. Demand for Germany’s benchmark 10-year Bunds rose, with yields moving 0.02 percentage points lower to minus 0.28 per cent. Italian government debt rallied in tandem. Bond yields fall as prices rise.
The debate about when to start winding down the huge bond-buying programmes launched by central banks around the world in response to the economic shock of the pandemic is one of the major issues that policymakers must confront.
The Bank of Canada said on Wednesday it would scale back its monthly bond-buying in response to the improving economic outlook. But the US Federal Reserve said last month it was not ready to reduce its asset purchases and the Bank of England said recently it expected to complete its bond-buying “around the end” of this year.
At the ECB’s last monetary policy meeting in March, it decided to conduct emergency bond purchases at a “significantly higher pace” in the second quarter to mitigate the risk of an “unwarranted” increase in borrowing costs.
The more conservative members of the ECB council hope that conditions will improve enough in the coming weeks to justify reducing the pace of bond-buying when it publishes new forecasts in June, although other council members regard that as premature given the low level of inflation.
In the latest evidence of the improving outlook, the European Commission’s consumer confidence indicator outstripped expectations in April by hitting its highest level since the start of the pandemic.
“The ECB faces a communication challenge,” said Jacob Nell, head of European economics at Morgan Stanley. “Short term, growth is likely to be robust and inflation will temporarily hit the [ECB’s] target in [the second half of 2021] which the hawks in the council may use to argue the case for tightening.”
Lagarde said that tapering of bond purchases had not been discussed at this week’s meeting and any change would be “data-dependent”, based on an assessment of the outlook for inflation and financing conditions.
“Euro area financing conditions have remained broadly stable recently,” she said, adding that the eurozone was “not on the same page” as the US in terms of inflation expectations and the interest rate cycle.
Carsten Brzeski, head of macro research at ING, said: “You could see a situation where vaccinations have clearly improved by the time of the ECB’s next meeting in June and there is a bit of an upward revision of its inflation forecast, which may mean they start to signal tapering is coming — but even then I think they will do it gradually.”
The central bank kept its deposit rate at minus 0.5 per cent and reiterated its stance that its €1.85tn emergency bond-buying programme could be further expanded or not used in full, depending on its progress in stimulating a recovery in output and inflation.