A man walks by the Euro sculpture in front of the old the European Central Bank in Frankfurt, Germany, Tuesday, May 5, 2020. Photo: AP Photo/Michael Probst
The European Central Bank left interest rates unchanged on Thursday as had been widely expected by the market.
The ECB’s governing council maintained the eurozone’s headline interest rate at 0% and kept the deposit rate for banks at -0.5% in a near identical update to last month’s. The central bank’s suite of unconventional monetary tools were left at existing levels.
The euro was little changed against the dollar (EURUSD=X) and the pound (GBPEUR=X) shortly after the announcement.
President Christine Lagarde said the EU was on track for a “firm rebound” later in the year but said the near-term outlook remained “clouded”. Lagarde said the path of the COVID-19 pandemic remained the major driver of economic performance across Europe.
“There are clearly signs of improvement,” she said. “On the other hand, we are clearly seeing continued contagion.”
The backdrop to the decision is a slow roll out of vaccines across the EU that has hurt the bloc’s economic recovery prospects. Revised forecasts published by the OECD last month show the EU is expected to grow much slower than the G20 average this year and next.
“Countries like Germany and France, mainly in Europe, are vaccinating far more slowly,” Laurence Boone, the OECD’s chief economist, said. “That makes it harder to recover.”
Lagarde said a “cross check” of conditions showed that an “ample degree of economic accommodation” was still necessary to help the economy on the path to recovery.
At its last meeting in March, the ECB had stepped up the pace of its government bond buying programme to counter a sell-off of government debt across the EU. Investors had sold debt in anticipation that the central bank would be forced to raise interest rates sooner than had been anticipated.
Recent data showed inflation hit 1.3% across the eurozone in March, accelerating rapidly from February’s reading of 0.9%.
However, the ECB’s governing council has signalled it will only raise rates when strong and sustainable growth has taken root across the bloc. GDP went into reverse at the end of 2021 and is expected to contract again in the first quarter.
The governing council on Thursday said it would continue to buy bonds at “a significantly higher pace than during the first months of the year.”
“It looks like the ECB is happy to let inflation run higher and only let bond yields move up if due to better growth: it’s now all about real yields,” said Neil Wilson, chief market analyst at Markets.com.
The governing council said the ECB was “ready to adjust all of its instruments, as appropriate.”
ECB president Christine Lagarde is due to give a press conference setting out more details on the central bank’s decision at 1.30pm UK time.