European Central Bank hits pause on stimulus, urges leaders to act on economy

The European Central Bank hit pause Thursday after deploying massive stimulus measures in recent weeks and urged government leaders to do their part by agreeing on an EU-wide fund to support regions hardest hit by the virus outbreak.

ECB President Christine Lagarde said that “an ambitious and coordinated” effort from government leaders on a proposed recovery fund “remains critical” to get the 19 countries that use the euro through the coronavirus downturn, on top of the monetary policies enacted by the central bank.

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European leaders are gathering Friday to discuss a collective plan to borrow and spend to promote a post-pandemic recovery, including through investment in digital services and a transition to an economy that emits less greenhouse gases. Differences remain over what kind of conditions would be attached to the money, among other topics.

Lagarde said that “it is important for the European leaders to quickly agree on an ambitious package.”

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“You are carrying a lot of hopes and expectations and we hope that you succeed,” she said at her post-decision news conference after the bank left rates and stimulus programs unchanged.

“It's often the case in Brussels that things take time and negotiations consume a lot of that time and energy,” she said. “There is a level of consensus and a determination to invest together, to recover together, and to support each other that will be demonstrated by a good agreement, by an ambitious agreement.”

The EU's executive commission has proposed a 750 billion euro ($857 billion) recovery fund, on top of 540 billion in previous support programs including wage support for companies in return for not laying people off. But there are disagreements on what conditions to attach to the money and how much of it will be loans and how much outright grants.

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The ECB held off providing new measures of its own on Thursday after its stimulus in recent weeks helped keep borrowing costs for companies and consumers at roughly pre-virus levels. At its last meeting June 4, the bank’s 25-member governing council increased its pandemic emergency bond purchase program by 600 billion euros to 1.35 trillion euros ($1.7 trillion), a step which pumps newly created money into the economy with the aim of keeping credit cheap and abundant for those who need it.

The ECB left its other stimulus settings unchanged on Thursday. The benchmark interest rate for lending to banks remains at zero and the rate it pays on excess cash left as overnight deposits remains at negative 0.5%. That is a penalty aimed at pushing banks to lend the money to businesses and households. The bank is also purchasing 20 billion euros in corporate and government bonds to support growth and strengthen inflation toward its goal of just under 2%. Inflation in June was 0.3%

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The EU’s executive commission forecasts the economy of the 19 countries that use the euro will contract by 8.7% in 2020 and grow by 6.1% in 2021.

Marco Valli, head of macro research at UniCredit bank in Milan, predicted that the ECB will eventually have to add more stimulus. The main unknown is “what happens to the recovery after the post-lockdown rebound fades, and how long it will take for GDP to return to its pre-crisis level," he said.

"None of the information that has become available since the June meeting can shed light on this, while the risk of a second wave of contagion will probably continue to loom for some time.”

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