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ECB holds interest rates steady

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·Senior City Correspondent, Yahoo Finance UK
·3-min read
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European Central Bank (ECB) President Christine Lagarde and European Commission President Ursula von der Leyen take part in a face-to-face EU summit amid the coronavirus disease (COVID-19) lockdown in Brussels, Belgium December 11, 2020. Olivier Hoslet/Pool via REUTERS
European Central Bank president Christine Lagarde (L) and European Commission president Ursula von der Leyen. Photo: Olivier Hoslet/Pool via Reuters

The European Central Bank (ECB) held interest rates unchanged on Thursday, as had been expected.

The ECB said it would maintain the eurozone’s headline interest rate at 0% and the deposit rate at -0.5%. Economists had expected policymakers to maintain rates at their current levels.

The central bank also left its programme of unconventional monetary policy unchanged. The ECB last year launched a pandemic-specific bond buying programme to support the economy through COVID-19 and has been offering cheap credit to banks in order to encourage lending. The programmes were extended and expanded at the ECB’s last policy meeting in December.

ECB President Christine Lagarde said risks were “tilted to the downside but less pronounced” than at the governing council’s last meeting, due to the start of COVID-19 vaccine rollouts around the world and the resolution of Brexit.

“The central bank is resting on its laurels following the boost to stimulus last month, with the statement broadly reiterating the steps it took last month,” said Claus Vistesen, Pantheon Macroeconomics’ chief eurozone economist.

While the ECB decided to stand pat this time around, the governing council signalled it would not hesitate to deploy additional stimulus in future if needed.

“The Governing Council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry,” the council wrote in a statement.

Inflation has remains stubbornly below the ECB’s 2% target. Prices declined by 0.3% in December, recent data showed.

The euro was little changed against the dollar (EURUSD=X) and the pound (GBPEUR=X) in the immediate aftermath of the statement.

At a press conference shortly after the policy announcement, Lagarde said recent data confirmed “pronounced near term weakness in the economy” and said the eurozone was likely to have contracted in the final quarter of 2020.

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The slow rollout of the COVID-19 vaccine across Europe and new strains of the virus have worsened the outlook over the last month.

Vistesen said the ECB’s decision to increase stimulus last month, against the prevailing narrative, meant there was enough firepower on the table already.

“The ECB's decision to boost stimulus occurred in an environment where 2021 forecasts were being upgraded, and markets rallying, in the belief that COVID-19 would be quickly brought to its knees at the start of 2021 by the new lockdown and vaccination,” he wrote in a note ahead of Thursday’s announcement.

“The virus will be beaten eventually, but the ECB's cautious December message, and the decision to tweak its stimulus, have aged like fine wine.”

Lagarde repeated her call for fiscal stimulus alongside monetary support, but cautioned government spending should be “targeted and temporary”. She called for structural reforms across Europe to help accelerate green and digital transitions.

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