European Central Bank to taper pandemic stimulus, but gently
FRANKFURT, Germany (AP) — The European Central Bank decided Thursday to avoid an abrupt end to its pandemic crisis support for the economy as the new omicron variant of COVID-19 stirs uncertainty about the recovery, despite inflation hitting record highs and the U.S. speeding up its stimulus exit.
The cautious approach comes as the 19 European Union member countries using the euro already are seeing the economic rebound slow because of a rise in infections from the delta variant and shortages of parts and raw materials. That has held back an economy that depends on trade and supply chains.
The bank confirmed that it will phase out its 1.85 trillion euro ($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. It also said the pandemic program could be resumed if needed.
The bond purchases drive down longer-term borrowing rates and aim to keep financing affordable so businesses can get through the pandemic slowdown.
Bank President Christine Lagarde said the measures decided Thursday would give the bank the “flexibility and optionality” to respond with more stimulus if trouble should arise.
Lagarde said supply bottlenecks were holding back the recovery and that the eurozone would not reach its pre-pandemic level until early next year. But growth should “pick up strongly” next year, giving the bank room to phase out the pandemic purchases step by step until they end in March.
“Overall, society has become better at coping with the pandemic waves and resulting constraints. This has lessened the pandemic impact on the economy,” she said.
But Lagarde also indicated that inflation would remain higher than the bank had earlier expected. It raised its forecast for inflation next year to 3.2%, in excess of its target of 2% and significantly higher than the 1.7% foreseen as recently as September.
The eurozone economy grew 2.2% in the third quarter from the previous quarter, but economists say that pace has already slowed significantly due to parts shortages and higher virus cases that discourage face-to-face indoor activity and add burdens on travel.
While many questions are unanswered about the fast-spreading omicron variant, including whether it can evade vaccines and the likelihood of severe illness, it didn’t stop the Bank of England from raising interest rates in the United Kingdom. Despite surging numbers of COVID-19 infections in the U.K., it became the first central bank among the world’s leading economies to raise rates since the pandemic began.
Analysts don’t expect a first European Central Bank interest rate increase from record lows until well into 2023.
In contrast to the ECB, the U.S. Federal Reserve decided to speed up its exit from pandemic crisis support, saying it would reduce its monthly bond purchases at twice the pace it had previously set and likely end them in March. That puts the Fed on a path to start raising rates as early as the first half of next year.
U.S. stimulus and infrastructure spending on top of a robust rebound in growth have resulted in stronger inflation pressures, compared with Europe.
As it winds down pandemic purchases, the European bank said it would add to a program that has been purchasing 20 billion euros ($23 billion) of bonds per month. Those monthly purchases will be boosted to 40 billion euros in the second quarter and 30 billion euros in the third quarter. The program would then revert to 20 billion but run for “as long as necessary,” an open-ended commitment.
The bank also said it would maintain earlier stimulus by reinvesting money from maturing bonds through 2024 and could do so in a targeted way to address any trouble spots. It said it would be able to purchase Greek government bonds as part of that, a key offer of support for the Greek economy since its bonds are rated below investment grade and therefore ineligible for the ECB’s ongoing bond purchases. Greece’s tourist economy has been hard hit by the pandemic.
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