July 16, 2020 / 7:21 AM / in 20 days

ECB to go all the way on stimulus even as economy recovers, Lagarde says

FRANKFURT (Reuters) - The European Central Bank will use its stimulus firepower fully even as the euro zone economy shows some signs of rebounding from its pandemic-induced recession, ECB President Christine Lagarde said on Thursday.

The headquarters of the European Central Bank (ECB) are pictured in Frankfurt, Germany, July 8, 2020. REUTERS/Ralph Orlowski/Files

Tackling the biggest economic collapse in living memory, the ECB is buying massive amounts of debt and paying banks to lend out its cash in an effort to salvage the bloc’s economy until Europe is ready to reopen after coronavirus lockdowns.

Lagarde said economic activity in the 19-country euro zone had shown signs of a “significant, though uneven and partial recovery” but the outlook remained uncertain amid risks of a second wave of infections.

“Uncertainty over the scale of the rebound remains high,” Lagarde said. “The balance of risks remain on the downside.”

Accordingly, the central bank sees no reason to hold back when deploying a 1.3 trillion euro ($1.49 trillion) envelope it has earmarked for buying financial assets under its Pandemic Emergency Purchase Programme (PEPP), Lagarde said.

“Unless, and we don’t see for the moment frankly, but unless there are significant upside surprises, our base line is that we will need the entire envelope of PEPP,” she added.

Lagarde’s comments come shortly after ECB board members Isabel Schnabel and Yves Mersch both hinted that the money would not need to be deployed fully if rate-setters deemed markets to have stabilised.

Equities have rebounded sharply and bond yields have fallen since the ECB announced a raft of stimulus moves in March, responding to a market crash that was threatening to transform the pandemic into a new financial crisis.

Lagarde also pushed back on criticism of the bank’s crisis-fighting measures, many of which were approved in haste and guided by acute market stress, like the blowout in Italian borrowing costs this spring.

Results so far showed its package was working and that further “ample stimulus” was needed to counter high uncertainty around efforts to combat the virus and mitigate its economic impact, she told a news conference.

“It’s effective, adequate and it’s working,” Lagarde said.

PRESSURE ON EU

Earlier, the ECB Governing Council kept policy on hold after a recent string of more positive economic data that followed a double-digit fall in output in the three months to June.

ECB policymakers may have also wanted to keep up pressure on European Union leaders to finally agree on long-delayed fiscal support, thus reducing the burden on monetary policy alone.

“It is important for European leaders to quickly agree on an ambitious package,” Lagarde noted on the eve of a Brussels summit where leaders will attempt to bridge national differences on a new 750-billion-euro scheme of EU grants and loans.

A looming second wave of the pandemic is raising doubts about the speed of the recovery, a point highlighted by ECB chief economist Philip Lane, who argues that Europe faces a “two step forward, one step back” recovery. That could mean better data now provides little guidance about the path ahead.

Rising coronavirus case numbers around the globe are also likely to weigh on consumer and business confidence, holding back spending and investment and raising the chance that any recovery would be slow, uneven and prone to interruptions.

With exports, industrial production and confidence indicators still muted, economists say the ECB’s pause is only temporary and that more action could come this autumn.

Lagarde said that despite evidence of a “bottoming out” in April, there remained high uncertainty about the ability of authorities to contain the spread of the virus and to counter the impact on incomes, employment and consumer demand.

PEPP purchases are due to continue until at least June 2021, with proceeds from those purchases to be reinvested until the end of 2022, she said.

($1 = 0.8750 euros)

Editing by Catherine Evans

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