Europe’s stimulus likely to keep running as economies reopen

FILE – In this file photo dated October 5, 2020, red warning lights shine on the building of the European Central Bank in Frankfurt. The European Central Bank is expected to put its stimulus measures in full swing on Thursday – even if the economies of the 19 countries that use the euro currency are showing increasing signs of robust recovery as pandemic restrictions are eased. (AP Photo / Michael Probst, file)

FRANKFURT, Germany (AP) – The European Central Bank is expected to keep its stimulus measures in full swing on Thursday – even if the economy shows signs of recovery as pandemic restrictions ease.

And that could pose a challenge to ECB boss Christine Lagarde. It faces a balancing act: recognizing the improvement in economic data without triggering a premature market reaction that anticipates a possible reduction in central bank support to the economy.

Any talk of an economic cut could mean higher borrowing costs for companies – the last thing the ECB wants right now.

“Even if the economic development in our view would at least warrant an initial tapering discussion, the mere mention of such a discussion could drive up bond yields further and thus undermine the economic recovery before it has actually started,” said Carsten Brzeski, Global Head of Macro at ING Bank.

The central bank of the 19 countries that use the common euro currency buys around 85 billion euros a month in government and corporate bonds as part of measures totaling 1.85 trillion euros (2.25 trillion US dollars), which is at least up to Should run early next year. The purchases drive up the prices of bonds and depress their interest income, as the price and yield move in opposite directions. This affects and lowers longer-term borrowing costs across the economy.

This is exactly what the bank wants at a time when many companies are struggling with lower demand and higher debt and have to keep credit lines open in order to get to the other side of the pandemic.

However, any indication that the ECB is considering slowing purchases could push market rates higher than central bankers would like. As a result, any discussion could be postponed to the Bank’s meeting on September 9th or later.

The US Federal Reserve will face a similar communication challenge; Several officials said that as the economy recovers, the US Federal Reserve will ultimately have to rethink its stance. She currently buys $ 120 billion worth of bonds every month. Fed policy makers will meet on June 15-16.

IHS Markit’s surveys of purchasing managers showed that activity increased sharply in May, including in the heavily affected service sector. The index reached 57.1 with anything over 50 indicating expansion. The statistics of economic output in the first quarter were revised from minus 0.6% to minus 0.3%; the ECB expects a strong recovery in the second half of the year and growth of 4.0% for the full year 2021.

Rising inflation also complicates the messages from the ECB. Normally, rising prices would cause a central bank to withdraw its stimulus. In this case, however, ECB officials and economists say the recent higher inflation numbers are the result of temporary factors that are easing and inflation will stay below the ECB target.

The annual inflation rate in the euro zone reached 2.0% in May, mainly due to higher oil prices. The ECB’s target is below, but close to, 2%. However, the baseline comparison of lower oil prices during the pandemic year 2020 will soon disappear from the statistics, so that post-pandemic inflation could be weaker than the current figures would otherwise suggest.

Top bank officials have made stimulating comments in the past few days, leading analysts to believe there will be no real change on Thursday. At its March 11 meeting, the government council said it would “significantly increase” pandemic purchases in the April-June quarter.

“Following the coordinated messages from the ECB spokesman over the past few days, we expect the ECB to stay on course and buy assets at the current high pace,” said Paul Diggle, deputy chief economist at Aberdeen Standard Investments. “But either way, investors will want to see the ECB pull the needle in to talk about economic recovery while avoiding the dreaded word ‘rejuvenation’.”

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