European Central Bank to cut stimulus measures in case of pandemic, but slowly
FRANKFURT, Germany (AP) – The European Central Bank has spoken out against a sharp withdrawal of its pandemic support for the economy as the new omicron variant of COVID-19 raises uncertainty over the continent’s recovery.
Thursday’s move comes despite inflation reaching record highs and the United States accelerating its stimulus release.
The bank has confirmed that it will phase out its 1.85 trillion euros ($ 2.1 trillion) pandemic bond purchase stimulus on schedule next year, but will maintain some of the effect by moving part of the purchases to another support program. –
The 19 member countries of the European Union that use the euro had previously seen the economic rebound slow due to an increase in infections of the delta variant and shortages of parts and raw materials. This has held back an economy that depends on trade and supply chains.
THIS IS A CURRENT UPDATE. AP’s previous story follows below.
FRANKFURT, Germany (AP) – The European Central Bank is pulled in two ways: it is caught between a programmed end of its pandemic stimulus package and growing alarm over the new omicron variant of the coronavirus even as other central banks in the all over the world are deciding to take action to combat soaring consumer prices.
The dilemma facing the bank and President Christine Lagarde at their meeting in Frankfurt on Thursday is compounded by a wave of infections caused by the earlier delta variant. On top of that, persistent shortages of parts and raw materials are also contributing to a slowdown in the year-end recovery in the 19 European Union countries that use the euro.
Many questions remain about the rapidly spreading omicron variant, including whether it can escape vaccines and the likelihood of serious illness. This makes the outcome of Thursday’s European Central Bank meeting more difficult to predict than usual, analysts said.
“Rarely has the backdrop for a major ECB decision been as uncomfortable and uncertain as it is now,” analysts at Berenberg Bank said.
With the eurozone economy below 0.3% of its pre-pandemic level and inflation at an all-time high of 4.9%, there are factors pushing “for a reduction. significant and rapid monetary stimulus, âBerenberg analysts said. “However, the recent spike in infections in central Europe and the rapid spread of the omicron variant (…) cast a shadow over the short-term outlook for the euro area.”
Analysts say the bank’s board will likely confirm that a â¬ 1.85 trillion ($ 2.08 trillion) bond purchase stimulus will end as scheduled in March 2022. But the The bank could decide to maintain some of the pandemic stimulus by shifting some of the bond purchases to a pre-existing program. He could also promise to restart the pandemic program if necessary.
Bond purchases lower long-term borrowing rates and are aimed at keeping financing affordable so businesses can weather the pandemic downturn.
The Bank of England faces a similar difficult decision on Thursday between higher inflation and concerns about the omicron. Analysts say an increase in the bank’s benchmark rate is possible. If it were to raise rates, it would be the first central bank in the world’s major advanced economies to do so since the start of the pandemic.
Analysts don’t expect the European Central Bank’s first interest rate hike from record lows before 2023, a year or more behind expectations for the U.S. Federal Reserve’s rate takeoff.
The Fed decided to speed up its exit from support for the pandemic crisis, saying on Wednesday it would cut its monthly bond purchases to double the pace it had previously set and likely end it in March. This puts the Fed on track to start raising rates as early as the first half of next year.
Inflation in the eurozone is well above the European bank’s 2% target, but banking officials and many economists say the rise in consumer prices is temporary and will end. will likely ease next year. The most recent projections by the bank’s staff project inflation of just 1.5% in 2023. New forecasts, including the first inflation outlook for 2024, are expected at Thursday’s meeting.
It’s a different situation than the Fed is facing, where US stimulus and infrastructure spending, along with a strong rebound in growth, have resulted in stronger inflationary pressures.
The eurozone economy grew 2.2% in the third quarter from the previous quarter, but economists say the pace has already slowed significantly due to parts shortages and higher virus cases that are discouraging retailers. face to face indoor activities and add loads on travel.