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European Central Bank leaves stimulus running hot ahead of recovery

Europe stimulus flows on

The European Central Bank left its key pandemic support for the economy running full blast even as the economy shows signs of recovery thanks to lower virus cases and fewer restrictions on activity in the 19 countries that use the euro currency.

The bank said in its policy statement Thursday that its emergency bond purchases would remain at “a significantly higher pace” over the coming quarter than during the first three months of the year. That mirrored language from its last meeting on April 22, changed only to extend the higher pace of purchases by a quarter.

ECB President Christine Lagarde is expected to walk a fine line at her news conference between acknowledging improving economic prospects and underlining that the stimulus will not be withdrawn before the recovery is on more solid ground.

Analysts say she will likely avoid any talk of a stimulus taper because that could send market borrowing costs higher for companies.

The central bank for the 19 countries that use the shared euro currency has been purchasing around 85 billion euros per month in government and corporate bonds as part of a 1.85 trillion euro ($2.25 trillion) 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. Purchases were stepped up in March amid lagging vaccinations and high COVID-19 case numbers.

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 Sept. 9 meeting or later.

The U.S. Federal Reserve will face a similar communications challenge; several officials have said that as the economy recovers, the U.S. central bank will eventually have to reassess its stance. Currently it is purchasing $120 billion in bonds each month. Fed policymakers next meet June 15-16.

IHS Markit’s surveys of purchasing managers showed activity increasing sharply in May, including for the hard-hit services sector. The index reached 57.1, with anything over 50 indicating expansion. Statistics for economic output in the first quarter were revised up to minus 0.3% from minus 0.6%; the ECB expects a strong rebound in the second half of the year and growth of 4.0% for all of 2021.

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.



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