Europe to stick with stimulus despite economic recovery

The European Central Bank has decided to keep its post-Covid stimulus package in place, even as economic recovery gathers steam and inflation surged past the bank's target.

As expected, the ECB's 25-member governing council  held interest rates at historic lows, including a negative bank deposit rate.

The bank also made no tweaks to its 1.85-trillion-euro ($2.2 trillion) pandemic emergency bond-purchasing scheme (PEPP), aimed at keeping credit cheap in the eurozone.

Attention now turns to ECB president Christine Lagarde's 1230 GMT press conference, where she can expect a grilling on when policymakers might start unwinding or "tapering" their crisis bond buys.

The outlook for the 19-nation currency club has brightened on vaccine progress and booming post-lockdown demand as businesses reopen.

But observers say Lagarde is likely to stress the need to play it safe and keep support flowing to avoid a premature rise in borrowing costs that could derail the rebound.

"Even if economic developments would in our view clearly justify at least having a first tapering discussion, the sheer mention of such a discussion could push up bond yields further and consequently undermine the economic recovery," said ING bank economist Carsten Brzeski.

A similar debate is raging in the United States, where concerns are growing that the Federal Reserve could be forced to reduce its bond-buying scheme or even lift interest rates earlier than planned to prevent the economy from overheating.

Traders are anxiously awaiting US inflation data for May, due to be released during Lagarde's press conference.

Observers expect the figure to come in close to five percent, well beyond the Fed's two-percent target.

'Unusually' high inflation 

In the eurozone, inflation hit 2.0 percent in May, its highest level in nearly three years and overshooting the ECB's benchmark of "close to, but below" 2.0 percent.

Core inflation however, which strips out energy and other volatile items, remains muted.

Lagarde has previously pledged that the ECB will "look through" what is forecast to be a brief surge in headline inflation.

The rapid jump in consumer prices has been fuelled by higher oil prices and temporary factors including shortages of raw materials and pent-up demand as different sectors emerge from shutdowns.

"If the inflation situation in Europe is not as dramatic as in the US, those are quite unusual waters for the eurozone," said Ipek Ozkardeskaya, a Swissquote analyst.

Still, she said, "European businesses need support, and the ECB is here to provide them the support they need."

Lagarde will unveil updated quarterly forecasts Thursday, with observers saying inflation estimates could be revised upwards from the current 1.5 percent for 2021 and 1.2 percent for 2022.

Economic growth estimates are predicted to stay broadly unchanged at 4.0 percent this year and 4.1 percent in 2022.

The ECB has for years maintained an ultra-loose monetary policy in a bid to drive up anaemic inflation and boost economic growth.

As well as record-low interest rates, it has offered super cheap loans to banks to encourage lending and investments.

On top of the PEPP bonds, it is also hoovering up 20 billion euros a month in government and corporate bonds under a pre-pandemic asset purchasing scheme.

The ECB announced in March that it would accelerate the monthly pace of PEPP purchases, to calm market jitters about rising bond yields at the time.

Observers expect the faster pace to be maintained until September, when the ECB could start tapering the purchases. The emergency scheme is set to run until the end of March 2022.

(with AFP)