European Central Bank sticks to key rates and pandemic policy

The latest European Central Bank (ECB) meeting suggests that the central bank will keep monetary policy settings as accommodative as is needed to help the single-block reverse the economic damage caused by the coronavirus.

The increased risk to the economic outlook is likely to be the focus of ECB President Christine Lagarde's 1330 GMT news conference but economists expect her to strike a balanced tone, arguing that longer-term prospects remain broadly unchanged even if the coming quarter or two may be weaker than projected.

The ECB kept its deposit rate at -0.5%, its main refinancing operations rate at 0%, and the marginal lending facility rate at 0.25%. Germany has extended its partial lockdown until February 14, France has imposed a 6 p.m. curfew, and Portugal has hit multiple records in case numbers.

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

That is darkening the already gloomy outlook for the first few weeks of 2021, after Europe ended 2020 with fanfare over the start of vaccinations. 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.

After the "recalibration" in December, the European Central Bank is going to adopt a more "wait and see" approach in the coming months as they await more key developments to play out before signaling any interest to change their policy stance later in the year.

The ECB's bond purchases support the region's governments as they spend freely on job-furlough and other programs aimed at keeping businesses and jobs alive.

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The president may also be quizzed on the persistently strong euro, which has been above US$1.20 since early December and is near a record high on a trade-weighted basis. She reeled off a list of "positives" including the approval of the European Union's recovery fund, a pickup in manufacturing, the removal of political uncertainty in the USA and the rollout of vaccines.

Still, Lagarde said last week that some uncertainties relating to Brexit and the US elections have cleared, and that the European Central Bank already assumed measures to limit the spread of the virus would be in place through the first quarter.

The ECB said on Thursday that the total envelope need not be used in full if "favorable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP", but added that the envelope can also be recalibrated to maintain favorable financing conditions and counter pandemic shock. The scheme was also extended to March 2022.

Also in December, the ECB announced more ultra-cheap loans for banks, with rates getting more attractive the more they lend on to the real economy.

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.

In December, inflation stood at minus 0.3%.