Euro Area: ECB keeps ultra-loose monetary policy unchanged in April
At its meeting on 22 April, the European Central Bank (ECB) kept rates on the main refinancing operations, the marginal lending facility and the deposit facility at their respective all-time lows of 0.00%, 0.25% and -0.50%, and it left the total amount of its stimulus measures unchanged. Meanwhile, the Bank stated that it expects net asset purchases under the pandemic emergency purchase program (PEPP) to be substantially higher in the second quarter than in Q1, in order to prevent financing conditions from tightening and sustain the recovery.
The economy likely contracted again in Q1, as household spending and the tertiary sector were seemingly weighed down by a tightening of Covid-19 containment measures throughout the currency union. Meanwhile, inflation rose to an over one-year high in March, although the Bank ascribed the acceleration to transitory factors such as higher energy prices. The short-term outlook remains surrounded by uncertainty stemming from ongoing Covid-19 restrictions amid persistently high infection rates and sluggish vaccine rollouts. That said, progress in vaccination efforts and the eventual easing of restrictions, together with sizable fiscal and monetary stimulus and a brightening global backdrop, should fuel the recovery in the medium term.
Against this backdrop, the Bank reiterated that “an ambitious and coordinated fiscal stance remains crucial” to help the recovery, and that fiscal measures must “remain temporary and targeted in nature”. The ECB once again highlighted how critical the implementation of productivity-enhancing structural policies will be to raise potential growth and increase economic resilience.
Commenting on the latest decision and possible future moves, Carsten Brzeski, chief Eurozone economist at ING, noted:
“Today’s meeting was never expected to be a killer one anyway. Instead, expect the June meeting to be very exciting. If the more optimistic projections for the vaccination rollout really materialise […] some 50% of all eurozone citizens could have had a first jab when the ECB meets next, on 10 June. If this is the case, the next batch of staff projections could show an upward revision to the growth forecasts and a confirmation of the economic recovery in the second half of the year. Combined with a further acceleration of inflation (forecasts) on the back of higher input prices and the German VAT reversal, there will be sufficient ingredients at the June meeting to have a serious discussion about the timing of tapering.”