Monday, 3 Aug 2020

ECB to take pause even as pandemic worries rise

FRANKFURT (Reuters) – Taking a pause after a series of extraordinary moves, the European Central Bank is all but certain to keep policy on hold on Thursday, scrutinizing instead the effectiveness and any unwanted side-effects of its crisis-fighting measures.

Tackling the biggest economic collapse in living memory, the ECB has bought record amounts of debt and paid banks to lend out its cash, all in hope of salvaging most of the bloc’s economy until Europe is ready to reopen after the coronavirus pandemic.

But its decisions were also made in haste and often guided by acute market stress, like the blowout in Italian borrowing costs this spring, leading some critics to argue that it is bending its own rules too far.

ECB inaction would also keep up pressure on European Union leaders to finally agree on long-delayed fiscal support, a much-needed measure that would reduce the burden on monetary policy.

A policy pause is also underpinned by a string of better than expected economic data after a double-digit fall in gross domestic product (GDP) in the three months to June, suggesting the 19-country euro zone’s economic contraction may not have been as bad as feared.

A looming second wave of the pandemic is raising doubts about the speed of the recovery, however, 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.

“The ECB can hardly relax, its job is far from done,” Berenberg economist Florian Hense said. “Despite the ongoing recovery, the risks to the outlook remain tilted to the downside, including the risk of a major second wave of the COVID-19 pandemic and harsh, nationwide lockdowns in major European economies.”

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.

The euro was a touch lower against the U.S. dollar at 0630 GMT after hitting a four-month high at $1.1451 on Thursday.

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Thursday’s ECB meeting is likely to hear some grumbling about the side-effects of the policy, including deviation from the ECB’s so-called capital key, which requires the bank to buy bonds in proportion to the size of each euro zone economy.

While the bank has said this remains a “guiding” principle, some worry that straying too far from this rule could open it to yet another legal challenge in Germany, just weeks after that country’s top court attempted to curb its powers.

Policymakers are also likely to express annoyance that EU leaders are once again dragging their feet with a fiscal response, overburdening ECB policy, much as they have done over the past five years. They may also discuss the relaunch of a strategy review.

Economists nevertheless say more ECB action is a matter of time.

When called upon, the bank is still likely to increase bond purchases, provide a bigger exemption to banks from its punitive negative deposit rate and could buy more debt from various EU institutions that support the recovery.

The ECB delivers its decision at 1145 GMT, which will be followed by ECB President Christine Lagarde’s news conference at 1230 GMT.

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