FRANKFURT – The European Central Bank will dial back some of its massive emergency pandemic support for the economy amid signs of increasing business activity and consumer readiness to spend as the 19 countries that use the euro rebound from the coronavirus recession.
Bank head Christine Lagarde was careful to say the shift was only a “recalibration” of existing stimulus — not a signal that pandemic support is being phased out.
The bank's 25-member governing council decided Thursday that it would conduct its bond purchase stimulus at “a moderately lower pace” than in recent months. Since March the statement has said that the bank would purchase bonds at a “significantly higher pace” than in the first three months of the year.
The “rebound phase in the eurozone economy is increasingly advanced," Lagarde said Thursday, putting the eurozone on track to return to pre-pandemic activity by the end of the year. She said however that the program wasn't being tapered, or reduced stepwise on the way to ending it: “The lady isn't tapering,” she said. She cautioned that there was ”some way to go before the damage from the pandemic is overcome" such as ongoing job losses.
Thursday's decision arrives ahead of upcoming governing council discussions about how and when to phase out the program, which is slated to run at least through March 2022. The U.S. Federal Reserve has already indicated it is moving toward scaling back its bond purchase stimulus by year end.
Higher inflation across the globe has raised questions about whether central banks will eventually need to tighten monetary policy to cool off the economy. In the ECB’s case, inflation of 3% in August exceeds the bank’s goal of 2%, but Lagarde said that is mostly due to temporary factors that sooner or later should ease. The bank foresees inflation of 1.7% next year and 1.5% in 2023, still below its target.
The eurozone economy emerged from recession in the second quarter with growth of 2.2% and a number of economic indicators show activity is picking up strongly. Europe’s recovery initially lagged those in the U.S. and China due in part to initial short supply of vaccines in early 2021. But Europe has since made progress and reached its goal of vaccinating 70% of the adult population, although there are wide differences among countries. Retail foot traffic has already returned to pre-pandemic levels, and indexes of business activity show a strong expansion after a double-dip recession at the end of last year and the beginning of this year.
While the current picture is brighter, the recovery faces hurdles from supplier bottlenecks like a semiconductor shortage that has clipped auto production, and also the spread of the delta variant of the coronavirus, which has led to fears a fourth wave could mean more trouble for the economy this winter.
The 1.85 trillion ($2.2 trillion) bond purchase program has no set amount for purchases each month. Analysts have suggested the bank could ease purchases back back to 70 billion euro or 60 billion euros, from roughly 80 billion per month since the “significantly higher” announcement. The purchases, made with newly created money, drive down longer-term borrowing rates and lower the cost of financing for businesses and other economic activity.
ECB policy is closely watched because any shift can have wide-ranging effects on borrowing costs, stock and bond markets and growth. For one thing, the ECB has played a key role in cushioning the blow from the pandemic by holding down bond market rates. That has made it easier for governments to borrow and deliver crucial support to ordinary people and businesses large and small through tax breaks, loan guarantees and salary support for furloughed workers.
The U.S. Federal Reserve indicated last month that it was moving closer to scaling back its $120 billion in monthly bond purchases, although weaker-than-expected data on U.S. jobs growth on Friday lends support to the camp that believes tapering may be farther off than first thought. The Bank of England maintained its stimulus levels at its Aug. 5 meeting, although it laid out a road map for eventually starting to reduce its bond purchases in years ahead.