'Elevated uncertainty' in eurozone keeps ECB buying bonds

Central bank president Christine Lagarde says ongoing fears over economic health are weighing on business and consumer spending

European Central Bank president Christine Lagarde appears on a laptop during a live stream of a news conference following its interest rate decision in Frankfurt, Germany. Hollie Adams

European Central Bank President Christine Lagarde, warning of “elevated uncertainty” and slack in the economy because of the coronavirus, pledged to continue taking whatever steps needed to shore up growth and inflation.

The ECB chief spoke after her Governing Council agreed on Thursday to keep their pandemic bond-buying programme unchanged at €1.35 trillion (Dh5.6tn) and the deposit rate at -0.5 per cent.

“Actual and expected job and income losses and the exceptionally elevated uncertainty about the evolution of the pandemic and the economic outlook continue to weigh on consumer spending and business investment,” she told reporters in Frankfurt. “Ample monetary stimulus remains necessary.”

Ms Lagarde said the central bank currently expects to spend the full amount of its bond programme, in apparent contrast to some policy makers, including her Executive Board colleague, Isabel Schnabel, who recently said the full amount may not be needed.

Risks to the outlook remain “to the downside”, Ms Lagarde said. “The Governing Council remains fully committed to doing everything necessary within its mandate to support all citizens of the euro area through these extremely challenging times.”

With coronavirus cases contained in most of Europe and economies reopening, officials have time to judge whether the recovery will be sustained.

Still, the outlook remains fragile and much depends on whether European Union leaders can settle their differences over a groundbreaking €750 billion recovery fund when they meet in Brussels on Friday.

Dutch prime minister Mark Rutte has spearheaded resistance to the proposal in its current form, calling for stronger conditions tied to EU grants. He told members of parliament on Tuesday that he is “sombre” about the summit.

Ms Lagarde said it is important for leaders to “quickly agree” on a package.

While ECB policy makers have started to sound slightly less pessimistic about the rebound in recent public appearances, they remain wary of another spike in infections – a risk underscored by local outbreaks in some regions and a resurgence in the US.

They’ve also warned that the path back to pre-crisis levels of activity will be arduous, marked by higher unemployment and bankruptcies that could increase sharply when government aid programs end. Countries will have to work out how to deal with the massive debt burdens they’re building up.

A recent ECB survey showed financial institutions nervous of the economic outlook preparing to tighten lending standards considerably, which could dampen growth.

Most economists surveyed by Bloomberg expect another €500bn to be added to the pandemic purchase programme by the end of this year.

The European Commission last week projected an economic contraction of almost 9 per cent for the euro area this year, in line with the ECB’s June assessment. It also warned that southern European nations including Italy and Spain face a much bigger hit than northern countries such as Germany.

Ms Lagarde backed that view.

“Before Covid-19 hit, there was already a divergence and degree of divergence among member states,” she said. “There’s a risk that divergence persists, which should be avoided. That’s why we welcome the recovery fund.”