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ECB less pessimistic on 2020 downturn despite virus 'headwinds'

Some analysts think ECB may add more stimulus in December

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Ms Lagarde says it's very likely that the ECB would use up the full 1.35-trillion euro envelope of its pandemic bond-buying scheme.

Frankfurt

EUROPEAN Central Bank chief Christine Lagarde on Thursday said the eurozone's pandemic-induced downturn was expected to be less severe than initially feared, but a recent spike in Covid-19 cases was causing "headwinds" for the recovery.

Ms Lagarde also addressed concerns about the recent appreciation of the euro, which can have a slowing effect on inflation and complicates the bank's efforts to push price growth higher.

The rise of the euro was "extensively discussed" when ECB governors held their meeting, Ms Lagarde told reporters in Frankfurt in an online press conference. The "appreciation of the euro is something to be monitored carefully", she added.

The governing council made no changes to its ultra-loose monetary policy, keeping interest rates at historic lows and leaving its 1.35-trillion-euro (S$2.2 trillion) pandemic emergency bond-buying scheme in place.

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Ms Lagarde said the central bank would continue to provide an "ample degree" of monetary accommodation to support the 19-nation currency club through the Covid-19 crisis.

"The strength of the recovery remains surrounded by significant uncertainty as it continues to be highly dependent on the future evolution of the pandemic and the success of containment policies" to curb the outbreak, Ms Lagarde said.

Incoming data suggested "a strong rebound" in the third quarter of 2020, Ms Lagarde said, after global Covid-19 lockdowns contributed to a record second-quarter slump in the eurozone. But fears are growing that a recent uptick in Covid-19 cases across Europe could trigger renewed restrictions on public life, hampering the rebound.

The jump "in coronavirus infection rates during the summer months constitutes headwinds to the short-term outlook", Ms Lagarde warned. She added that it was "very likely" that the ECB would use up the full 1.35-trillion-euro envelope of its pandemic bond-buying scheme.

Unveiling the ECB's latest forecasts, Ms Lagarde said the eurozone economy is likely to shrink by 8.0 per cent this year, compared with an earlier projection of -8.7 per cent.

Growth will return in 2021 and 2022, at 5.0 per cent and 3.2 per cent respectively, slightly below the predictions in June.

The ECB's 2020 inflation outlook remained unchanged at 0.3 per cent, and is expected to climb to a slightly higher than expected 1.0 per cent next year. For 2022, the bank kept its inflation projection at 1.3 per cent. The projections remain well off the bank's target of reaching price growth of "close to, but below" 2.0 per cent.

Many analysts believe the uneven recovery prospects and stubbornly low inflation - which even turned negative in August - will prompt the ECB to add more stimulus in December. AFP

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