The ECB is leaving policy unchanged despite the deteriorating economic outlook

The ECB is leaving policy unchanged despite the deteriorating economic outlook

The European Central Bank has left its monetary policy unchanged and has decided not to give any further boost to the eurozone economy despite a renewed spike in coronavirus infections, which is triggering new activity restrictions in some of the bloc’s largest economies.

The ECB kept its deposit rate at minus 0.5 percent and kept its emergency bond purchase plan at 1.35 billion euros in its latest political announcement on Thursday.

The bank said risks are "clearly tilted down" and promised to undertake a "thorough reassessment of the economic outlook and balance of risks" and "recalibrate its instruments if necessary to respond to the evolving situation" next meeting in December.

In a clear signal that the economy will be likely to get cheaper money later this year, the central bank said it will “ensure that funding conditions remain favorable to support the economic recovery and the negative impact of the pandemic the forecasted inflation counteract path ".

She said she would "carefully examine the information it receives, including pandemic dynamics, the prospect for vaccine adoption and the development of the exchange rate" – identifying the main factors that could influence her decision to further ease monetary policy.

Following the announcement, ECB President Christine Lagarde stated that it was "necessary to take action and therefore recalibrate our instruments", adding that ECB staff had already started work on possible adjustments to "all of our instruments" .

Ms Lagarde said there had been no discussion of possible changes to their policy at this week's governing council meeting, but all members supported the need to recalibrate their instruments in December.

Before changing policy, the ECB would use “all the flexibility” of its emergency bond purchase program, she added: “We did this for the first wave [the pandemic] and we will do it for the second wave. ”

There are "clear headwinds to the near-term outlook" after recent data showed "a significant slowdown in economic activity in the final quarter of the year," she warned.

The ECB's decision comes a day before new figures are expected that the eurozone fell in October for its third consecutive month of deflation.

Inflation is likely to remain negative through early next year due to lower energy prices and a temporary German VAT cut, Ms. Lagarde said, although the post-containment recovery "will push demand upward".

Friday's gloomy price data is accompanied by gross domestic product figures, which suggest record growth of almost 10 percent between the second and third quarters. The region is recovering from a deep recession in the first half of this year.

However, the outlook for the eurozone economy has deteriorated in recent days as countries like France and Germany reported record coronavirus infections on a daily basis and announced new restrictions on social interaction and movement – including curfews and closings of bars, restaurants, leisure facilities and not essential business.

Andrew Kenningham, an economist with Capital Economics, said the ECB had "made clear its intention to provide more assistance in December," adding, "With the region's two largest economies on the verge of new national lockdowns and others likely to follow suit." , we would do this. " do not rule out the possibility that the bank may move beforehand. "

The partial lockdowns are not as severe as they were in the March pandemic in Europe when schools and factories were left open. However, economists expect to drag the economy into a new contraction and curb the recovery in production that began in the third quarter.

"The possibility of a double-dip recession cannot yet be ruled out as the new restrictions being introduced across the euro area to curb the current recurrence of Covid-19 cases will once again increase uncertainty for households, businesses and banks ", said Kerstin af Jochnick, said a member of the ECB's supervisory board in a speech on Thursday.

Ms Lagarde expressed concern that governments should keep fiscal support to the economy, and stressed the need for the EU's € 750 billion recovery fund to be "up and running" after it got stuck in talks on details.