Despite a rebalancing of the risks weighing on the euro area economy and a sharp rise in inflation, the Governing Council of the European Central Bank (ECB) decided on Thursday 10 June not to change the very accommodating monetary policy it has been pursuing since the outbreak of the Covid-19 pandemic.
“Preserving favourable financing conditions over the pandemic period remains essential to reduce uncertainty and bolster confidence”, said ECB President Christine Lagarde. According to her, a slight tightening of financing conditions has already been observed “in Germany and the Netherlands” in terms of corporate financing.
Mrs Lagarde reported a rebound in economic activity, especially in the services sector, as a result of vaccination campaigns and the gradual lifting of health measures. The ECB now expects activity to accelerate in the second half of the year thanks to sustained consumption and the continuation of fiscal measures that are more targeted at sectors in difficulty.
The monetary institute has revised upwards its forecasts for GDP growth in the euro area, which could reach 4.6% in 2021 and 4.7% in 2022. For 2023, the forecast remains unchanged at 2.1%.
However, uncertainties about the evolution of the pandemic remain, and the “scars” left by the economic crisis, particularly in terms of employment, will take time to heal. As such, the Next Generation EU Recovery Plan will be very useful in supporting workers affected by the pandemic and will help them to take advantage of the environmental and digital transitions in the economy, said the former IMF Director.
As regards price inflation, the trajectory clearly started to rise again at the beginning of the year, with inflation increasing from 1.3% in March to 2.0% in May. According to the ECB, this increase will continue in the short term before inflation declines towards the end of the year as temporary price drivers (energy costs, national fiscal measures) fade.
According to the ECB, inflation should therefore be 1.9% in 2021, 1.5% in 2022 and 1.4% in 2023. Again, forecasts have been revised upwards for this year and next, but remain unchanged for the following year.
“Something is changing: core inflation is picking up slightly. But we are far from our ultimate goal”, said Mrs Lagarde. Excluding energy and food prices, core inflation is expected to increase gradually to 1.1% in 2021, 1.3% in 2022 and 1.4% in 2023.
Continued strong pace of sovereign purchases
Although the analysis of the economic situation is more favourable, the Governing Council reaffirmed that in the coming quarter the purchases of mainly government securities under the ‘PEPP’ operation initiated at the outbreak of the pandemic will continue “at a significantly higher pace than in the first few months of the year”.
But Mrs Lagarde cut short market players’ expectations that the PEPP operation would be slowed down. Any discussion of an exit strategy from the operation is “ premature and unnecessary”, she said. She said that all of the governors supported the statement issued after the meeting, while admitting that “some differences of opinion” on the issue of the pace of purchases had been expressed.
It should be noted that the ECB expects to unveil the results of the strategic review of its monetary policy, which has been delayed due to the pandemic, in the second half of the year. (Original version in French by Mathieu Bion)