Fundamental Comment

ECB revises up growth forecasts despite high uncertainty

ECB holds rates, stimulus to help economy overcomer Covid-19

The most recent data released from the euro suggest rebound in economic activities, but the levels are still below the pre-pandemic levels, ECB President Christine Lagarde said.

She cited the high uncertainty surrounding economic recovery, given the fact that it hinges on how the pandemic develop.

However, the ECB has revised up its forecast for real GDP growth in 2020 to -8.0%, up from -8.7% predicted three months ago. As for 2021, the ECB still predicts growth of 5%, and 3.2% expansion in 2022.

Headline inflation in the euro area, on the other hand, will probably remain negative for the next few months due to “subdued price pressures” from the rise in the euro’s exchange rate and a recent VAT cut in Germany.

The ECB now estimates inflation to turn positive in 2021, slightly above the central bank’s objective of 2 percent.

ECB Rate Decision

After holding the headline interest rate at 0%, deposit rate at -0.5% and the main refinancing operations rate at 0.25%, the ECB continued its pledge to pump 20 million euros per month to help the economy overcome the negative repercussions of the Covid-19.

The Governing Council will also continue its purchases under the pandemic emergency purchase programme (PEPP) to cushion the ‘downward’ impact on prices during the pandemic, the ECB said.

“These purchases contribute to easing the overall monetary policy stance, thereby helping to offset the downward impact of the pandemic on the projected path of inflation,” according to the ECB statement.

The ECB also says that it’s pressing on with its 1.35-trillion-euro programme to guard the euro area economy from the Covid-19 calamity.

The euro traded higher for a second straight session versus the U.S. dollar at 1.1850, continuing its r3covery from yesterday’s bottom of 1.1752.

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