The European Central Bank warns of the risks of Corona and renews its pledge to support the economy

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careful European Central Bank Today, Thursday, that the Corona outbreak poses a “danger” to the path of return to growth in the eurozone, according to its president Christine LagardeHe maintained monetary support measures for the economy before releasing his risk analysis.

Lagarde said, during a press conference held after a meeting in which the board of governors of the financial institution decided to maintain the financial support program for the economy affected by the health crisis, that “the intensification of the epidemic poses risks to the economic prospects in the near term.”

The financial institution chose to keep the set of tools it approved to combat the crisis, and significantly strengthened them during its last meeting in December 2020.

The financial institution kept its “pandemic emergency bond purchase program”, the main weapon in hand European Central Bank, Which it began implementing in March to maintain favorable financing conditions and encourage spending and investment, at a level of 1850 billion euros, which is the spending ceiling set until March 2022.

She stressed the flexibility of her strategy, explaining that this amount may not be “fully spent” if the current purchases are found to be sufficient to ensure good financing conditions, but that it can be increased in return in the event of having to tighten measures to confront a “negative shock” resulting from the epidemic.

As for the other program to buy back assets, the quantitative easing program adopted by the epidemic, it will be maintained at its current rate of twenty billion euros per month without specifying a time period.

The financial institution will also grant banks new installments of low-cost loans, while maintaining interest rates that have fallen to their lowest historical levels.

The bank decided to continue charging a fee of -0.5% on a portion of the cash deposited with it, a measure that has been in place since September 2019 to encourage the redistribution of funds in the form of loans.

As for the main interest rate applied to recapitalize banks in the near term, it was kept at zero, its level since 2016. These measures aim to allow countries, companies and families to borrow at low cost in order to encourage investment and jobs, and ultimately support prices.

Additional risks

Observers agree that the financial institution that has been striving to combat the crisis in the eurozone since the start of the Covid-19 epidemic is not facing a pressure situation forcing it to increase the size of its intervention, according to “AFP”.

Andrew Cunningham, an economist at Capital Economics, said the European Central Bank would “wait a few months.” The bank is closely following the development of the health situation at a time when hopes of a rapid economic recovery were dampened with the outbreak of the second wave of the epidemic at the end of last year, and the accompanying new restrictions and measures in Europe.

“The intensification of the epidemic poses risks to the economic outlook in the near term,” Lagarde told reporters. She added, “It is possible that there will be a contraction in production in the fourth quarter of 2020” after the strong recovery in the summer following the lifting of quarantine measures in Europe. The first quarter of 2021 will also appear to be disappointing due to continuing restrictions in Europe.

Strong EUR

Bond markets remain stable despite the government crisis in Italy and the Netherlands, which reassures the European Central Bank.

Eric Dor, director of research at the Institute of Scientific Economics and Management, told “AFP” that this “proves the effectiveness of the European Central Bank’s policy to contain any increase in long-term interest rates”, after that was the reason behind the outbreak of the debt crisis in the euro area at the turn of the millennium.

However, the rise in the euro price poses a dilemma for the European Central Bank, which is unable to push inflation to rise, aiming to reach 2% at an annual rate, which is considered appropriate to encourage economic activity.

Since the end of February, the single currency has increased by more than 10% relative to the dollar. Lagarde said the European Central Bank was “closely watching the exchange rates”. A strong euro lowers the cost of imports but makes exports less competitive.

Inflation is expected to rise gradually this year, after remaining negative in the euro area between August and December, but Lagarde warned that “price pressures will remain low due to lower demand in the tourism and travel sectors and the high price of the euro relative to the dollar.”

Decline in consumer confidence

In addition, figures released today, Thursday, showed that consumer confidence in the euro zone decreased by 1.7 points in January compared to December, according to Reuters.

The European Commission said a preliminary estimate showed consumer sentiment dropped to -15.5 this month from a revised reading of -13.8 for December. In the entire European Union, consumer confidence fell 1.6 points to -16.5.





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