President of the European Central Bank (ECB) Christine Lagarde.
FRANCISCO SECO | AFP | Getty Images
LONDON – The European Central Bank left interest rates unchanged on Thursday as euro countries continue to struggle with rising Covid-19 infections and subsequent lockdowns. However, it reiterated that it was “ready” to adjust its instruments if the economic situation did not improve.
The main refinancing operations of the ECB, the marginal credit facility and the deposit facility will remain at 0.00%, 0.25% and -0.50% respectively, according to a statement.
In December the ECB stepped up its massive economic stimulus program to support the economic recovery in the region. The pandemic emergency purchase program was extended to March 2022 and amounted to 1.85 trillion euros (2.25 trillion US dollars) for bond purchases. This enables eurozone governments to get cheaper interest rates when borrowing from public markets.
However, there are doubts about how the euro area is doing this year after GDP (gross domestic product) fell by 7.3% last year, according to ECB forecasts.
The New Year began with tighter social restrictions and national bans in many of the 19 countries that share the single currency. For example, this week Germany extended a national lockdown until February 14th. The Netherlands have announced that there will be a curfew from next week. And France decided to tighten its curfew earlier this month, while Portugal will close schools from Friday.
According to the European Center for Disease Prevention and Control, there have been more than 16 million Covid-19 infections and more than 400,000 deaths in the EU.
“The Governing Council remains ready to adjust all of its instruments as necessary to ensure that inflation approaches its target in a sustainable manner,” the ECB said in a statement.
European leaders hope to speed up vaccinations in the coming months to curb the spread of the virus and its economic impact. The European Commission, the EU’s executive branch, has asked member states to vaccinate at least 70% of their adult populations by the summer.
Despite the difficult situation, the ECB has maintained its growth forecasts for this year. Speaking at an event earlier this month, Central Bank President Christine Lagarde said, “I think our last predictions in December are still very clearly plausible.” In December, the bank estimated the GDP rate to be 3.9% for 2021 and 2.1% for 2022.
Dovish for a “long time”
“As the euro zone vaccination program gains momentum, the economy should recover from the spring,” said Joseph Little, global chief strategist at HSBC Global Asset Management, in a research note following the announcement.
“Despite the prospect of a revitalized recovery, the ECB is likely to remain cautious for a long time, as the economy is around 7% smaller than a year ago,” he added.
Many economists expect the ECB to leave its policy unchanged for the foreseeable future, even if the lockdowns continue beyond March.
“Even if some of these downside risks were to materialize, the policy implications would be limited,” said Andrew Kenningham, chief economist for Europe at Capital Economics, in a long-time email. “
