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Central Bank of Europe to continue monetary stimulus

FRANKFURT, Jun 10 – PRIME / Dow Jones. The European Central Bank improved its economic forecasts for the eurozone, but at the same time announced the continuation of an aggressive monetary policy, signaling a possible divergence of its rate with the rate of the US Federal Reserve, which may begin to roll back emergency support measures as early as next week. At a press conference on Thursday, ECB President Christine Lagarde said she expects a strong recovery in economic activity across the continent as the pace of vaccinations picks up and stores and restaurants open. At the same time, she warned that Europe is lagging behind the US in recovery, noting that more than one in seven Europeans are still unemployed or on unpaid leave. In the US, annual inflation jumped to 5% in May, the highest in nearly 13 years, while inflation in the eurozone is only 2%. The US and the eurozone “have very different starting points, with different levels of fiscal stimulus,” Lagarde said. If the US economy has already recovered to the pre-crisis level and, perhaps, even exceeded it, then the eurozone will regain its positions lost during the pandemic only next year. The ECB said in a statement that the key interest rate will remain at -0.5%, as well as the continuation of purchases of Eurozone bonds in the range of the emergency PEPP program worth 1.85 trillion euros (2.2 trillion US dollars) at least until the end of March 2022 … The ECB also noted that bond purchases will be carried out at a “substantially higher” pace than in the first months of this year, echoing a statement made in March. This decision was expected and did not cause much excitement in the financial markets. The yield on 10-year Italian government bonds fell to 0.750% from 0.776% on Wednesday, while the yield on similar Greek bonds fell to 0.808% from 0.833%. Lagarde said that the ECB leadership has not yet discussed a slowdown in bond purchases, adding that such a discussion would be premature. Representatives of the FRS leadership, on the contrary, have recently signaled their readiness to raise the topic of curtailing stimulus at a meeting on June 15-16. Any divergence in exchange rates between the ECB and the Fed will impede the euro against the dollar, supporting European enterprises in the recovery phase. “The Fed is holding back other central banks,” said Stephen Gerlach, a former deputy governor of Ireland’s central bank. “If the ECB decides to tighten monetary policy before the Fed, for example, the euro will jump against the dollar, hurting European exports.” Meanwhile, some analysts believe that against the background of the growing pace of economic recovery in the eurozone, the position of the ECB, which is waiting for more positive news in order to adjust its policy, may be unjustified. “The longer the ECB keeps its foot on the accelerator after the economy picks up steam, the harder it will be to plan a smooth exit,” said Holger Schmiding, chief economist at Berenberg Bank. The ECB said Thursday that it expects the eurozone economy to grow by 4.6% this year and 4.7% next year, while in March it predicted growth of 4% and 4.1%, respectively. The ECB forecasts inflation at 1.9% this year and 1.5% next year against the March forecast of 1.5% and 1.2%. Analysts believe that the ECB will soon have to change course and present plans to phase out bond purchases to prevent overheating of the economy. This could happen at meetings in September or December, they believe. The sharp rise in commodity prices over the past year heightens investor fears that the acceleration in inflation may be more persistent. This will push up market interest rates and trigger large shifts in global asset prices and capital flows. At the same time, the ECB is likely to avoid easing stimulus before it presents the results of a protracted revision of the monetary strategy. These results are due in the fall and may suggest a change in inflation target, analysts say. If, after the revision, the ECB raises target inflation to 2% from “just below 2%”, then additional stimulus will be required. The ECB may also choose to hold off on signals until Fed Chairman Jerome Powell is more open about cutting US asset purchases, which analysts say could happen during the Aug. 26 Jackson Hole Economic Symposium. “It’s easier for the ECB to follow a leader than to lead itself,” concludes Marcel Alexandrovich, an economist at Jefferies. – Posted by Tom Fairless, [email protected]; translation by PRIME, +7 495 645 3700, [email protected] Dow Jones Newswires, PRIME

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