ECB paves the way for December stimulus as lockdowns return
October 29 2020 09:58 PM
Christine Lagarde
ECB president Christine Lagarde speaks during a live stream video of the central bank’s virtual rate decision news conference in Frankfurt yesterday. Rising Covid-19 cases and containment curbs have led to a “clear deterioration” in the eurozone’s near-term outlook, but it is too early to say if the economy will shrink in the fourth quarter, she said.


The European Central Bank signalled it stood ready to bolster its pandemic stimulus in December as surging coronavirus infections darken the eurozone’s economic outlook.
With risks “clearly tilted to the downside”, the ECB said it would use next month’s updated growth and inflation forecasts to “recalibrate its instruments, as appropriate, to respond to the unfolding situation”. The promise of further action comes a day after France and Germany joined Italy and Spain in introducing fresh lockdown measures to halt a second Covid-19 wave, set to inflict more economic pain.
The ECB has rolled out a €1.35tn bond-buying scheme to keep borrowing costs low and boost the economy, and many observers expect the scheme to be beefed up at the next monetary policy meeting in December.
As expected, ECB governors left the scheme, known as PEPP, unchanged yesterday.
They also kept key interest rates at historic lows and maintained their ultra-cheap loans to banks, as well as a pre-pandemic asset-purchasing scheme to the tune of €20bn a month.
ECB president Christine Lagarde said rising Covid-19 cases and containment curbs have led to a “clear deterioration” in the eurozone’s near-term outlook, but it is too early to say if the economy will shrink in the fourth quarter.
Third-quarter economic growth data might be better than expected but the fourth quarter is almost certain to be below forecasts, with November “very negative,” she told the European Central bank’s post-meeting news conference.
How the virus is managed between now and the end of the year will determine what side of zero the fourth-quarter number will fall on, she added.
While stimulus measures taken by the ECB since March are helping to underpin economic activity, risks are “clearly” tilted to the downside, she said. New staff macroeconomic projections in December will allow the ECB to make a thorough assessment of how it should recalibrate its policy response, she said. 
She previously told the French daily Le Monde that any economic recovery seen during the summer “now risks losing momentum” as new shutdowns across the continent hamper business activity.
She is also expected to reiterate calls for eurozone governments to share the load with more fiscal stimulus.
“The European Central Bank keeps its powder dry, but signals a clear willingness to act next month,” said ING economist Carsten Brzeski.
Andrew Kenningham, an economist at Capital Economics, said the ECB might pull the trigger earlier than expected. “With the region’s two biggest economies about to enter fresh national lockdowns, and others likely to follow suit, we would not rule out the possibility that the bank moves even before then,” he said.
The ECB’s unprecedented monetary stimulus is aimed at bolstering economic growth and driving up stubbornly low inflation to its goal of “below, but close to two percent”. Eurozone inflation, however, stood at -0.3% in September after dropping into negative territory in August, raising the dreaded spectre of deflation in the 19-nation currency club.
Deflation, or a spiral of falling prices, is a worry for policymakers because it can deter customers from spending in anticipation of even cheaper prices, creating pressure on businesses who may end up cutting jobs or closing down.
Inflation in Germany, Europe’s top economy, yesterday came in at -0.2%, the same rate as in September, dragged down by lower energy prices and a temporary sales tax cut. Based on its September forecasts, the ECB expects eurozone inflation to inch up to 1.3% by 2022, still far off the official target.
The eurozone economy was expected to shrink by eight% this year before rebounding to see 5% growth in 2021.
However, most analysts agree that the latest setbacks in the fight against the virus mean those forecasts are now outdated, with the fourth quarter of 2020 likely to be worse than expected.

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