European Central Financial institution Steps Up Its Stimulus because the Economic system Contracts

FRANKFURT – On Thursday, the European Central Bank gave the Eurozone economy renewed impetus and warns that the economic crisis caused by the pandemic is likely to continue well into 2022 despite the introduction of new vaccines.

The bank’s governing council, which met on Wednesday and Thursday, expanded and expanded programs to keep borrowing costs down for businesses and consumers in the euro area, hit by increased lockdowns and rising job losses.

The measures include a de facto money printing program valued at more than $ 2 trillion and an initiative effectively paying banks to lend money to businesses and consumers.

A second wave of coronavirus cases is causing the eurozone economy to contract again in the final months of the year, Central Bank President Christine Lagarde explained the reasons for the decisions during a press conference.

The latest data, said Ms. Lagarde, suggests that “the pandemic is having a stronger impact on the economy in the short term and inflationary weakness is lasting longer than previously thought.”

The euro area will not achieve herd immunity to the virus until late 2021, and the pre-pandemic economy will not regain its strength until mid-2022, the central bank economists said Thursday.

Even after vaccines made most people immune, the European Central Bank needs to continue pumping money into the euro area to boost chronically low inflation, say economists. Consumer prices fell at an annual rate of 0.3 percent in November and are not expected to rise until next year.

The central bank is supposed to keep inflation close to 2 percent, but even it doesn’t expect to hit that target anytime soon. The bank forecast on Thursday that inflation would be 1.4 percent in 2023.

“You will have to do more even after the pandemic has taken its course,” said Florian Hense, an economist at Berenberg Bank in London.

As part of its efforts to stimulate the economy, the European Central Bank said Thursday it would reduce the purchase of pandemic-related bonds – essentially a money printing program – by € 500 million to a total of € 1.85 trillion, or US $ 2.2 trillion. Dollar increase. The bank expected to continue the purchases through at least March 2022, nine months longer than planned.

Buying bonds is one way to lower market rates to keep borrowing costs down.

The central bank also extended for a year to June 2022, an initiative that allows commercial banks to borrow money at negative interest rates, provided banks pass the credit on to their customers.

Updated

Apr. 10, 2020, 2:13 pm ET

With interest rates as low as minus 1 percent under certain conditions, the central bank actually pays lenders to use the money as a means of pumping credit into the economy.

The new incentive came as no surprise after Ms. Lagarde telegraphed the intentions of policy makers at a press conference in October and then repeated the message several times.

The central bank’s actions on Thursday ensure that borrowing costs in the 19 countries in the eurozone will remain exceptionally low for the foreseeable future, making it much easier for governments to fund aid programs for affected citizens and businesses. The bonds issued by Spain and Portugal, once considered risky, hit a record low of almost zero percent on Thursday.

The eurozone economy rebounded sharply in the third quarter of this year, but is shrinking again after the bloc’s governments reinstated curfews, indoor restaurant bans and other lockdown measures due to a surge in coronavirus cases.

The burden was particularly high for restaurants, hairdressing salons and other companies that rely on personal contact. “The service sector is still bearing the brunt,” said Ms. Lagarde.

The pandemic is not the only problem facing the euro area. Negotiations with Great Britain to leave the European Union have stalled, which increases the risk of a disorderly separation.

In addition, the euro gained strength against the US dollar, trading at $ 1.21 on Thursday. This is a threat to Europe as products from countries like France, Germany and Italy become more expensive when purchased using other currencies. A strong euro also makes it difficult for the central bank to meet its inflation target as prices of imported goods fall.

Ms. Lagarde handled the exchange rate problem with caution because the central bankers had agreed not to provoke currency wars. The European Central Bank will “continue to monitor developments”.

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