European Central Bank to continue generous stimulus

The European Central Bank is all but certain to maintain a generous flow of stimulus when policymakers meet on Thursday, fearing that higher borrowing costs could smother a still nascent recovery, Reuters reports.

Just emerging from a pandemic-induced double-dip recession, the 19-country euro zone economy has relied on unprecedented ECB stimulus to stay afloat. And even as growth surges with the easing of coronavirus restrictions, policymakers appear keen to err on the side of caution.

Recent comments from ECB President Christine Lagarde and board member Fabio Panetta suggest the June discussion effectively ended even before Thursday’s meeting, with a cut in bond purchases unlikely, even if policymakers acknowledge an improvement in growth prospects and the rapid pace of vaccinations.

Panetta flatly rejected any reduction in emergency bond buys while Lagarde said it was “far too early” to discuss tapering the bank’s 1.85 trillion euro Pandemic Emergency Purchases Programme (PEPP).

While policymakers could still opt for a different course, they usually line up behind their president and rarely make changes to proposals brought to the table by the six-member Executive Board.

Weak medium-term inflation prospects are the key rationale for maintaining copious support but policymakers are also concerned that borrowing costs are inching up, so that any retreat by the ECB might risk setting off potentially dangerous market volatility.

“The longer the ECB waits before it admits that the rationale to run its Pandemic Emergency Purchase Programme at full speed is no longer as strong as it was in March, the less gentle could the transition to fewer asset purchases be in the future,” Berenberg economist Holger Schmieding said. “If so, bond yields could ratchet up more strongly after a while.”

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