The European Central Bank decided on Thursday to keep its pandemic stimulus efforts unchanged even as consumer prices spike and central banks in other parts of the world look to dial back support as their economies bounce back from the worst of the Covid-19 outbreak.
Bank president Christine Lagarde underlined that the burst of inflation was temporary and the economy still needed support from the bank’s €1.85 trillion stimulus programme.
But she added that the programme would conclude at its previously announced earliest end date in March, opening the way for a decision at December’s meeting on what might come next.
The bank’s bond purchase programme drove down longer-term borrowing costs for businesses as they weathered shutdowns and for governments as they spent more on pandemic support.
Ms Lagarde said much of the surge in prices is tied to comparisons with low prices during the pandemic, recently higher fuel costs and demand outpacing supply as the economy reopens.
She said she expected all three to be temporary.
Today’s monetary policy statement at a glance – a thread:
The pandemic’s grip on the economy has loosened. People are confident about the future and keep spending.
But the growth momentum has moderated to some extent
1/4 pic.twitter.com/8jCirmL4NS— European Central Bank (@ecb) October 28, 2021
She said that “while the current phase of higher inflation will last longer than originally expected, we expect inflation to decline in the course of next year”.
The economy still needed support from the central bank, Ms Lagarde said, given that almost two million fewer people were employed than before the pandemic and three million were still in government furlough programmes that help companies keep workers by paying part of their salary.
Annual inflation in the euro zone hit 3.4 per cent in September, the highest since 2008.
Ms Lagarde said she and the council had done “a lot of soul-searching” over the analysis that inflation would fade but were convinced it was correct.
The announcement that the pandemic stimulus would end as scheduled — rather than leaving it open — was seen by Frederik Ducrozet, global macro strategist at private bank Pictet, as a mild shift in stance.
While tapering the support “shouldn’t be a surprise to any observer, the pre-commitment was unusually strong, in a possible concession” to stimulus sceptics on the council, Mr Ducrozet said by email.
President @Lagarde has just presented the Governing Council’s monetary policy statement.
Read the statement https://t.co/kj1hdOcUPb— European Central Bank (@ecb) October 28, 2021
Central banks usually raise interest rates and dial back stimulus efforts to combat rising prices. But the European Central Bank says it foresees inflation falling to 1.5 per cent by 2023, well below its goal of 2 per cent, and market expectations of a small interest rate increase by the end of next year is not in line with its outlook.
Meanwhile, the Bank of Canada decided on Wednesday to halt its bond purchase programme, while the central bank of Brazil raised interest rates for the sixth straight meeting this week and indicated rates would continue going up.
The US Federal Reserve has indicated it could announce a reduction in the pace of its monthly bond purchases as soon as November, though interest rate increases would be “premature”, according to chairman Jerome Powell.
The Bank of England has signalled it is getting ready to raise rates to combat inflation.
Ms Lagarde said comparisons to other central banks were not relevant, because some of them were already over their inflation target or were in countries with particular economic strengths, such as commodity exporters.
The euro zone has not yet reached its pre-pandemic level of output, unlike the US, which has seen a robust recovery following more extensive government spending.
The European Central Bank made no change to interest rate benchmarks, which remain at record lows.
The rate for European Central Bank lending to banks is zero, while the rate on deposits left overnight by banks is minus 0.5 per cent, meaning banks pay to deposit the money — a penalty rate aimed at pushing them to lend the funds instead.
