Euro Area: ECB stands pat in October; points to December meeting for further easing
On 29 October, the European Central Bank (ECB) decided to maintain rates on the main refinancing operations, the marginal lending facility and the deposit facility unchanged at their all-time lows of 0.00%, 0.25% and -0.50%, respectively. The Bank also reaffirmed its emergency quantitative easing program, leaving the size unchanged at a total of EUR 1,350 billion, and confirmed that the purchases will be conducted “in a flexible manner over time, across asset classes and among jurisdictions” in order to guarantee the smooth transmission of monetary policy. Moreover, it stated that it may take additional steps to support the economy at its next meeting in December, when new macroeconomic projections will be made available.
The Bank left its expansionary monetary policy stance unchanged in order to continue supporting activity. The economy contracted in the second quarter as it felt the full brunt of Covid-19-related restrictions, and seemingly rebounded strongly in the third quarter, benefiting from the gradual easing of restrictions and supported by loose fiscal and monetary policies. However, available indicators point to a clear loss of momentum at the beginning of Q4, and the recent tightening of containment measures throughout Europe amid surging Covid-19 cases will most likely put a brake on the recovery. Meanwhile, annual prices fell at the sharpest pace in over four years in September and are expected to keep falling over the coming months.
Against this backdrop, although the Bank decided to stand pat, it signaled it could take additional measures and “recalibrate its instruments, as appropriate, to respond to the unfolding situation” at December’s meeting, when a “new round of Eurosystem staff macroeconomic projections […] will allow a thorough reassessment of the economic outlook and the balance of risks”. At the same time, ECB President Christine Lagarde once again stressed that a coordinated fiscal response to the crisis remains crucial, although she also reiterated that 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:
“All in all, today’s ECB meeting follows a good old ECB tradition to first assess all the facts and jump the gun. Still, Christine Lagarde surprised with more dovishness and determination than expected, posing the only question if the ECB agrees on the need to act in December, why didn’t they act already today? Here is the answer: Had the ECB meeting taken place not one day but one week after the lockdown announcements in France and Germany, the outcome of the meeting would probably have been different.”