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ECB expected against strong euro and restrictions

The European Central Bank (ECB) is expected to strengthen its monetary support measures for the economy on Thursday before another delicate oral examination to assess the risks posed by continued restrictions against covid-19 and the appreciation of the euro.

The European Central Bank (ECB) is expected to strengthen its monetary support measures for the economy on Thursday before another delicate oral examination to assess the risks posed by continued restrictions against covid-19 and the appreciation of the euro.

(AFP) – Six weeks have passed since the last meeting in December. And, according to Florian Hense, economist at Berenberg, the ECB “remains to analyze the impact of its decision” which consisted in strengthening its monetary system to face the crisis caused by the pandemic.

Its main weapon, the emergency pandemic purchasing program (PEPP) launched in March to maintain favorable financing conditions, has been recalibrated to 1.850 billion euros and extended until March 2022. The other traditional asset buyback program, “QE,” must continue at the rate of 20 billion per month with no time horizon.

Likewise, the institution will grant banks new waves of cheap loans, while interest rates sail to their all-time low. Part of the liquidity deposited with the ECB instead of being distributed via loans has been taxed at -0.5% since September 2019. This arsenal which allows States, companies and households to borrow at low cost to stimulate the investment and employment, will be confirmed on Thursday.

More risks

The institution, which has played firefighters in the euro area since the start of the health crisis, is not under pressure to once again inflate its interventions, observers agree. But facing the press, from 1.30 pm, “Christine Lagarde’s communication skills will be put to the test again,” underlines Carsten Brzeski, economist at ING. Because the resurgence of the pandemic at the end of the year, with its procession of new restrictions in Europe, has dampened hopes of a rapid recovery.

The ECB was to judge that the risks on activity are “more oriented to the downside than in December,” said Brzeski. Fears are fueled by the spread of new variants of the virus, with poorly understood effects, as well as slower than expected deliveries of the first doses of vaccines. However, the President of the ECB wants to believe that the growth forecasts, namely 3.9% of GDP in the euro area in 2021, will be met. The ECB wants “to wait and see if the restrictions linked to the pandemic will last until the second quarter” and “to what extent this will affect the economy”, comments Fritzi Köhler-Geib, chief economist of the public bank KfW.

Strong euro

With more than 1,000 billion euros remaining to be spent under the PEPP, there is enough “to buy as many bonds this year as last year, while public deficits should be lower”, estimates Franck Dixmier, director of bond management at Allianz Global Investors. Bond markets remain calm despite government crises in Italy and the Netherlands.

This “clearly shows the effectiveness of the ECB’s policy in containing any increase in long-term interest rates”, which triggered the debt crisis in the euro zone in the 2000s, observes Eric Dor, research director at the Institut d ‘ scientific and managerial economics (IESEG). However, the appreciation of the euro poses a headache for the ECB, which is unable to push inflation up to 2% year-on-year, the level deemed adequate to help activity.

Since the end of February, the single currency has appreciated by more than 10% against the greenback. The Frankfurt institution must gauge to what extent a further rise in the euro would call for a more energetic response on its part. A strong euro lowers the cost of imports and makes exports less competitive. Inflation, negative in the euro zone from August to December, adds to this complicated equation. Even if a rise in prices is expected in 2021, in connection with the increase in VAT in Germany and the prospect of a return to a more normal life, the scope of this increase should be limited, according to economists.


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