Euro Area: ECB stands pat at July meeting

Euro Area Monetary Policy July 2020

Euro Area: ECB stands pat at July meeting

On 16 July, the European Central Bank (ECB) reaffirmed its quantitative easing program and maintained rates unchanged at all-time lows to support liquidity conditions and preserve the smooth functioning of money markets. The ECB kept rates on the main refinancing operations, the marginal lending facility and the deposit facility unchanged at 0.00%, 0.25% and -0.50% respectively. The Central Bank also maintained the size of its emergency quantitative easing program (PEPP) unchanged at a total of EUR 1,350 billion and reaffirmed the purchases will be conducted in a flexible manner, in order to guarantee a smooth monetary policy transmission.

The Bank retained the existing level of monetary stimulus to support the economic recovery as member states gradually ease restrictions. The economy contracted at an unprecedented pace in Q1; however, it likely bottomed out in April, before slowly recovering in May and June in tandem with the gradual reopening of the regional economies. On top of that, inflation ticked up in June but remained modest and is expected to remain subdued over the coming months. The Bank reaffirmed it stands ready to “adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner”.

After experiencing unprecedented economic damage from lockdowns in H1, the regional economy is projected to rebound in Q3, supported by expansionary fiscal and monetary policies and as governments lift containment measures further. That being said, the outlook remains surrounded by elevated uncertainty stemming from the effectiveness of the social distancing measures, the spillovers on demand plans and supply capacity and the magnitude of the impact on labor markets. European Central Bank President Christine Lagarde thus once again urged member states to adopt a coordinated fiscal response to the crisis, on top of the safety nets endorsed by the EU institutions. At the same time, she reiterated fiscal measures should be targeted and temporary, to ensure medium-term fiscal sustainability.

Commenting on the latest ECB decision, Carsten Brzeski, chief Eurozone economist at ING, noted:

“We stick to our view that the ECB will wait until the September meeting, if not the late October meeting, before deciding on any next steps. This is when after the initial V-shaped rebound of the eurozone economy, there will be a better picture of the actual recovery.”

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