ECB lifts restoration outlook however retains “regular hand” on stimulus By Reuters

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© Reuters. FILE PHOTO: The logo of the European Central Bank (ECB) in Frankfurt, Germany, January 23, 2020. REUTERS / Ralph Orlowski

By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) – The European Central Bank raised its growth and inflation outlook on Thursday but vowed to continue to provide ample stimulus as it fears a pullback now would accelerate a worrying spike in borrowing costs and stall the recovery.

ECB President Christine Lagarde said policymakers had agreed to make further emergency purchases in the next quarter “at a significantly faster pace” than in the first few months of the year, but did not provide any further details on expected levels.

“We will do this in the next three months depending on market conditions, which clearly include seasonality,” she said at a press conference, referring to the typically lower liquidity in the summer months in Europe.

“The conclusion we came to (in terms of the political approach) I would say ‘steady hand’.”

The 19-country eurozone has relied on the ECB’s extensive cash creation to fund skyrocketing government deficits, making the economy particularly vulnerable to any containment of stimulus measures.

The ECB bought around 80 billion euros in debt this quarter as part of the pandemic emergency purchase program (PEPP), compared to around 62 billion euros in the first quarter.

Markets largely shrugged the news as hints from board members, including Lagarde, made it clear that the ECB would rather play it safe and not risk an early cut in the bank’s € 1.85 trillion PEPP.

Maintaining its long-standing guidelines, the ECB also said that PEPP would last until March 2022 and that it reserves the right to buy less than its buy quota or increase it as needed to “maintain favorable financing terms”.

An increase in the ECB’s key economic forecasts for the euro-zone economy was also expected as vaccine programs accelerate and the prospect of their huge service sector getting back on track if measures to contain the pandemic weaken increase.

Production growth has been increased to 4.6% this year and 4.7% next year, compared to March forecasts of 4.0% and 4.1%, respectively. Inflation will now be 1.9% this year and 1.5% next year, up from previous projections of 1.5% and 1.2%, respectively.

While Lagarde said that core inflation has seen a “slight upward movement” once short-term factors are factored out, she stressed that the inflation picture remains subdued and the headline rate is far from its target of close to 2%.

“We are far from our ultimate destination. We are certainly not where we would like to be when the pandemic is over,” she said.

The ECB has also raised its growth forecasts, calling the risks “broadly balanced” instead of tilting them down.

Europe is also well behind the US in its recovery and is lagging behind when it comes to vaccinations, so withdrawing support from the US Federal Reserve would be seen as a dangerous signal.

Data released Thursday showed that the number of Americans filing new unemployment benefits fell last week to its lowest level in nearly 15 months, while consumer prices continued to rise in May as domestic demand surged.

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