The Governing Council of the ECB decided on Thursday 22 April to keep its very accommodating monetary policy unchanged due to the uncertainty linked to the Covid-19 pandemic still weighing on the euro area economy in the medium term.
In particular, the monetary institute will continue the current pace of repurchases of mainly government securities under the PEPP operation launched in spring 2020 at the outbreak of the pandemic. This rate had been “significantly” increased in mid-March to counter a rapid rise in interest rates on sovereign bonds (see EUROPE 12676/28). But the ECB does not quantify this increase in secondary market purchases.
“In March, we considered that we needed to significantly accelerate the pace of buyouts. We have continued to do this in a very determined way. And we will continue in the same way, because our analysis of the macroeconomic situation has remained broadly unchanged”, said ECB President Christine Lagarde.
She painted a picture in the euro area where downside risks to economic growth dominate in the short term, with a rebalancing in the medium term. As downside risks, she cited the pressure of the health situation on certain economic sectors and the emergence of new variants of the coronavirus. The roll-out of vaccination campaigns, on the other hand, has a positive impact on growth. In the services sector, one of the most affected by the pandemic, there are signs that a bottoming-out level may have been reached.
When asked about the considerations for a decision on slowing down the pace of buybacks under the PEPP operation, the former IMF head asserted that “no phasing out of the PEPP operation has been discussed, because it is simply premature”. According to the Commission, “the pace of buybacks is not time-bound, but depends on the available data”, i.e. a combination of funding conditions and inflation forecasts. A recalibration will take place in June, when new economic forecasts are available.
Euro area GDP fell by 0.7% in the fourth quarter of 2020, 4.9% below its pre-pandemic level a year ago. Ms Lagarde pointed to indicators showing a recession in the first quarter of 2021, but pointing to a return to growth in the second quarter.
Our analysis is that, on average, the euro area will return to its pre-crisis level “in the second half of 2022”, the ECB President said, noting the “heterogeneity” of the situations of each euro area country. (Original version in French by Mathieu Bion)