ECB sits tight as virus jitters grow | The Daily Star
12:00 AM, January 22, 2021 / LAST MODIFIED: 01:05 AM, January 22, 2021

ECB sits tight as virus jitters grow

European Central Bank governors on Thursday held back from tweaking their pandemic stimulus for the eurozone, even as concerns about new virus variants and slow vaccination drives darken the economic outlook.

Having already ramped up support in December, the 25-member governing council announced no changes to its ultra-loose monetary policy.

Attention now shifts to ECB chief Christine Lagarde's 1330 GMT press conference, where she will likely be grilled about how setbacks in the fight against the coronavirus, as well as a stronger euro, could impact growth forecasts for 2021.

The ECB last year took unprecedented steps to cushion the economic impact of the Covid-19 crisis on the eurozone. Its biggest weapon is a pandemic emergency bond-buying scheme, known as PEPP, that was in December topped up by 500 billion euros to reach a total envelope of 1.85 trillion euros. The scheme was also extended to March 2022.

In Thursday's statement, ECB governors introduced a sentence saying the envelope  "need not be used in full" if financing conditions remain favourable, but that it also could be  "recalibrated" if required.

As expected, the Frankfurt institution held key rates at historic lows, including a deposit rate of minus 0.5 per cent -- meaning banks pay to store excess cash with the ECB.

Policymakers also made no changes to their ultra-cheap bank loans, and are continuing their monthly pre-pandemic asset purchases to the tune of 20 billion euros. The goal of the measures is to keep borrowing costs low to encourage spending and investment in the 19-nation currency club.

But clouds are gathering once more. The emergence of more contagious virus variants in Britain and South Africa has fuelled fears of a possible surge in outbreaks, at a time when many countries are already struggling to bring down Covid-19 cases.

Europe's top economy Germany this week extended its partial lockdown until February 14 and Chancellor Angela Merkel has not ruled out border checks to slow the spread of the new variants. France and Spain have tightened their evening curfews, while non-essential shops are closed across much of the continent.

A sluggish start to vaccination drives in the European Union is also expected to drag on the recovery in the first quarter of 2021.

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

"Risks are now tilted further to the downside than in December, with extended and stricter lockdowns across the eurozone," said ING bank economist Carsten Brzeski.

The ECB's measures are aimed at keeping credit flowing in the eurozone in a bid to boost growth and inflation.

But eurozone inflation has stayed stubbornly low for years and even turned negative in 2020.By the ECB's own estimates, price growth will gradually inch up to 1.4 percent by 2023, still far off the bank's target of just under two per cent.

In December, inflation stood at minus 0.3 per cent.

Analysts say inflation could bound higher later this year, powered by pent-up consumer demand once lockdowns start easing, particularly in travel and dining out.But any boost is likely to be short-lived, they cautioned.

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

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

Minutes of the last ECB meeting showed that the governing council was paying  "close attention" to the exchange rate.

Nevertheless  "the euro has not reached a level where the ECB would step in," said Berenberg bank analyst Florian Hense.

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