European Central Bank easing support as recovery strengthens
Economic recovery concerns weigh on markets
Ironsides Macroeconomics Managing Partner Barry Knapp discusses the economic recovery, tightening of fiscal policy and the impact of more stimulus on the economy.
FRANKFURT, Germany (AP) — The European Central Bank says it is dialing back some of its massive emergency pandemic support for the economy. The move comes amid signs of increasing business activity and consumer readiness to spend as the 19 countries that use the euro rebound from the coronavirus recession.
The bank said Thursday that it could conduct its bond purchase stimulus at "a moderately lower pace" than in recent months. Since March the statement has said that the bank would purchase bonds at a "significantly higher pace" than in the first three months of the year.
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The 1.85 trillion ($2.2 trillion) bond purchase program has no set amount for purchases each month. Analysts have suggested the bank could ease purchases back back to 70 billion euro or 60 billion euros, from roughly 80 billion per month since the "significantly higher" announcement.
ECB head Christine Lagarde said at her post-decision news conference that "the rebound phase in the eurozone economy is increasingly advanced," leaving the eurozone on track to recover its post-pandemic level by the end of the year.
But she cautioned that there was "some way to go before the damage from the pandemic is overcome," referring to job loss.
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Thursday’s decision is an adjustment to existing policy that comes ahead of a broader and potentially more difficult discussion among members of the bank’s 25-member governing council about how and when to phase out the program, which is slated to run until the bank deems the coronavirus crisis phase is over and in any case at least through March 2022. The U.S. Federal Reserve has already indicated it is moving toward scaling back its bond purchase stimulus by year end.
The eurozone economy emerged from recession in the second quarter with growth of 2.2% and a number of economic indicators show activity is picking up strongly. Europe’s recovery initially lagged those in the U.S. and China due in part to initial short supply of vaccines in early 2021. But Europe has since made progress and reached its goal of vaccinating 70% of the adult population, although there are wide differences among countries.
While the current picture is brighter, the recovery faces hurdles from supplier bottlenecks such as the shortage of semiconductor parts that has held back production and sales in the auto industry, and from the spread of the delta variant of the coronavirus, which has seen case numbers rise in some countries amid worries that the fourth wave could mean more trouble for the economy this winter.
The decision comes as central banks including the U.S. Federal Reserve are looking ahead to how they will exit massive pandemic support efforts that have come alongside increased government spending across the developed world.
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Lagarde's assessment at her post-meeting news conference will be closely watched because any shift in central bank policy can have wide-ranging effects on borrowing costs, stock and bond markets and growth. For one thing, the ECB has played a key role in cushioning the blow from the pandemic by holding down bond market rates. That has made it easier for governments to borrow and deliver crucial support to ordinary people and businesses large and small through tax breaks, loan guarantees and salary support for furloughed workers.
The U.S. Federal Reserve indicated Aug. 27 it was moving closer to scaling back its $120 billion in monthly bond purchases, although weaker-than-expected data on U.S. jobs growth on Friday underlined that tapering may be farther off than first thought. The Bank of England maintained its stimulus levels at its Aug. 5 meeting, although it laid out a road map for eventually starting to reduce its bond purchases in years ahead.
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Higher inflation across the globe has raised questions about whether central banks will eventually need to tighten monetary policy to cool off the economy. In the ECB's case, inflation of 3% in August exceeds the bank's goal of 2%, but bank officials and economists think that is due to temporary factors. The bank foresees inflation of 1.5% next year and only 1.4% in 2023. New projections are due Thursday; if the inflation outlook is raised, that would on balance suggest an earlier reduction in stimulus.
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