ECB keeps stimulus as EU reopens

Photo: EPA

The European Central Bank earmarked it would keep its supportive tools in operation although EU economy has shown solid evidence for restart, AP reported. The fiscal supportive measures were intended to end as long as Covid-19 pandemic triggered an economic slowdown. At this point ECB will have to choose the right moment to withdraw from the market as a premature reaction is likely to do more harm than good.

Any talk of a stimulus ending could mean higher borrowing costs for companies - the last thing ECB wants right now. The central bank for the 19 countries that use the euro has been purchasing around 85 billion euros per month in government and corporate bonds as part of a 1.85 trillion euro effort slated to run at least through early next year. The purchases drive up the prices of bonds and drives down their interest yields, since price and yield move in opposite directions. That influences longer-term borrowing costs throughout the economy, sending them lower. That’s exactly what the bank wants at a time when many companies are struggling with reduced demand and higher debt and need to keep credit lines open so they can get to the other side of the pandemic. Any hint, however, that the ECB is thinking about tapering the purchases could send market rates higher earlier than the central bankers would like. That’s why any discussion could be postponed until the bank’s 9 September meeting or later. The US Federal Reserve will face a similar communications challenge. Several officials have said that as the economy recovers, the US central bank will eventually have to reassess its stance. Currently it is purchasing $120 billion in bonds each month. Fed policymakers next meet is on 15-16 June.

Rising inflation also complicates the ECB’s messaging. Normally, rising prices would lead a central bank to withdraw its stimulus. But in this case, ECB officials and economists say recent higher inflation figures are the result of temporary factors that will fade, leaving inflation below the ECB goal.

Eurozone annual inflation hit 2.0% in May due largely to higher oil prices. The ECB’s goal is less than but close to 2%. The base comparison to lower oil prices during the pandemic year 2020 will soon drop out of the statistics, however, meaning post-pandemic inflation could be weaker than current figures might otherwise suggest.

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