Although Europe’s economic prospects are improving rapidly, European Central Bank policymakers on Thursday decided to maintain their ‘very accommodative’ monetary stance.
Governments are lifting restrictions on the closure period and the roll-out of vaccines has accelerated, leading to a bounce in the service industry and an “ongoing dynamic” in manufacturing, Christine Lagarde, central bank president, news conference in Frankfurt told reporters.
“We expect economic activity to accelerate in the second half of this year as further controls are lifted,” she said.
But Lagarde stressed that much support was still needed and that policymakers were giving the economy a “firm hand”.
“Uncertainties continue to exist as the economic outlook in the short term still depends on the course of the pandemic,” she added.
The bank said it would keep interest rates at record lows and negative levels while continuing to buy bonds in its pandemic response program at a “significantly higher rate” for the next quarter, compared to the beginning of the year – currently at a rate of around 80 billion euros per month.
“The ECB is currently choosing to err on the side of caution rather than withdrawing monetary stimulus early,” ING analysts wrote in a note.
Central Bank staff also published new predictions for economic growth and inflation in the region. The eurozone economy will grow by 4.6 percent this year and 4.7 percent next year, compared to three-month forecasts that forecast growth of 4 percent and 4.1 percent.
In the United States, policymakers are watching rising inflation, which rose 5 percent in May, the fastest annual rate since 2008. Economists say a sustained rise in inflation will force the Federal Reserve to withdraw its monetary stimulus. But Lagarde said the American and European recovery was “a very, very different story.”
In the eurozone, inflation is expected to rise over the next few years, including core inflation, which excludes volatile energy and food prices, but the rise is “largely” due to temporary factors, the bank said. The central bank does not predict that price increases will rise above its target of 2 percent.
Personnel forecasts, which have been revised higher since March, point to an annual inflation rate of 1.9 per cent in 2021 and 1.5 per cent next year.
In March, the central bank increased the rate of asset purchases Pandemic Emergency Purchase Program, which is expected to buy 1.85 billion euros of debt by the end of March. Bond-buying programs are meant to keep interest rates low and smooth access to credit for businesses and households.
Data published earlier this week showed that the eurozone economy did not perform as badly as initially expected in the first quarter. Gross domestic product fell 0.3 percent in the first three months of the year, according to the statistics agency, not the 0.6 percent drop previously estimated.
Mrs. Lagarde also said it was too early for policymakers to start discussing when and how it could end its bond-buying pandemic program. “It’s too early, it’s premature, it’s unnecessary,” she said.