ECB keeps interest rates and stimulus unchanged

European Central Bank ready to boost support further if needed

(FILES) This file photo taken on November 27, 2019 shows Christine Lagarde, President of the European Central Bank (ECB), during a press conference in Frankfurt am Main, western Germany. European Central Bank governors meet on January 21, 2021 to take stock of their monetary stimulus efforts as more infectious strains of the coronavirus and stricter shutdowns cloud the economic outlook. / AFP / Daniel ROLAND
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The European Central Bank kept interest rates and its stimulus package unchanged on Thursday but did not close the door on boosting support in the future as the number of coronavirus cases in the continent continues to escalate.

ECB president Christine Lagarde held the pandemic bond-buying programme at €1.85 trillion ($2.26tn), following a €500bn boost last month, and reiterated that it will run until March 2022 at the earliest.

"The intensification of the pandemic poses some downside risks to the short-term economic outlook," Ms Lagarde said at a media briefing on Thursday.

As a result “an ample monetary stimulus remains essential” and the ECB stands ready to “adjust all its instruments” if needed, she said.

The bank also kept the deposit rate at minus 0.5 per cent, and said it would continue providing “ample” liquidity through long-term bank loans at a rate of minus 1 per cent.

"If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full," the ECB said.

Ms Lagarde said earlier this month that the lender would adjust its monetary stimulus programme if lockdown measures extend beyond the end of the first quarter, because the Pandemic Emergency Purchase Programme is flexible across assets and time.

Naeem Aslam, chief market analyst said there was “no gun fire from the ECB" with Ms Lagarde having to "wait and see the impact of the current monetary policy".

“If European governments do not provide support in terms of their fiscal policies, it is going to be incredibly difficult for the ECB to come out of their negative interest rate zone," Mr Aslam said.

Ms Lagarde said on Thursday that the economy likely contracted in the last three months of 2020 and the outlook going forward faced risks.

The number of Covid-19 cases have risen this winter, leading to new restrictions on businesses across Europe as the continent contends with new variants of the virus from the UK, Brazil and South Africa.

Ms Lagarde said that while the start of vaccinations against the coronavirus was an important milestone, the distribution had experienced some difficulties and the outbreak continued to pose “serious risk to the eurozone and global economies".

While manufacturing output continues to hold up well, services are being “severely curbed", she said.

Andrew Kenningham, chief Europe economist at Capital Economics, said the ECB’s decision on Thursday came as "no surprise" and that he doubts the central bank will make any major policy changes until the second half of this year.

“Christine Lagarde indicated last week that while the ECB’s December forecast for GDP growth of 3.9 per cent this year is 'very clearly plausible', she noted that risks would mount if the lockdowns remain in place beyond March – something which seems increasingly likely," Mr Kenningham said.

The European Union’s executive commission forecasts that the eurozone economy shrank 7.8 per cent last year and should rebound by 4.2 per cent this year.