The Governing Council of the European Central Bank (ECB) did not change its key interest rates or its very accommodative monetary policy, but reaffirmed this policy in light of the latest economic indicators, on Thursday 16 July, at its last meeting before the summer break. However, it stands ready to respond to any further deterioration in the economic situation marked by a very high degree of uncertainty about the severity of the economic impact of the Covid-19 pandemic.
“The Governing Council remains fully committed to doing everything necessary within its mandate to support all citizens of the euro area through this extremely challenging time” and to ensure that the medium-term inflation path is again in line with our mission, said ECB President Christine Lagarde.
The balance of risks to the euro area growth outlook remain on the downside, according to the ECB. The monetary institute observed that the euro area economy bottomed out in April and gradually recovered in May and June, although at a much lower level than before the pandemic. However, some sectors remain hard hit by the confinement measures and uncertainty in the medium term is high, although the European institution expects the rebound to strengthen in the third quarter of 2020.
Thus, the fall in Euro area GDP, which was 3.6% in the first quarter, will be even greater in the second quarter, despite the recovery in industrial production.
The ECB will continue to buy back mainly public bonds as part of the PEPP operation launched to counter the economic impact of the pandemic and amplified in early June (see EUROPE 12499/1). Stressing the flexible nature of this operation, Mrs Lagarde indicated that the monetary institute planned to use, as a base scenario, the entire €1.35 trillion envelope which will be deployed at least until June 2021. After starting off strong with €360 billion in purchases at the end of June, we have slowed the pace of acquisitions somewhat, because markets are more stable, she also noted.
On the eve of the extraordinary European summit on the EU budget post-2020 (see EUROPE 12529/1), the former IMF Managing Director reiterated the ECB's call for an “ambitious and coordinated” budgetary response by Member States to the crisis, which she said should also be “targeted and temporary”. She welcomed the European Commission's proposal to set up a Recovery and Resilience Facility (RRF) in the framework of the post-2020 budget. According to her, this budgetary instrument, which provides for the allocation of €560 billion, mostly in the form of subsidies to the countries most affected by the crisis, will help to combat discrepancies between countries.
“Before Covid-19, there were already discrepancies. Today, there is a risk that these discrepancies may persist. This must be avoided by all means”, Mrs Lagarde stressed. She called for an early agreement of the EU27 on the Multiannual Financial Framework 2021-2027, reiterating the importance of the message that an ambitious EU27 agreement this weekend would send to the world. (Original version in French by Mathieu Bion)