FRANKFURT, Germany — The European Central Bank is expected to signal Thursday that even if inflation rises later this year it won’t consider cutting back support for Europe’s economy, which is lagging the U.S. and China amid a drawn-out struggle with the COVID-19 pandemic.
Extended lockdowns amid a resurgence of the virus, coupled with slow vaccination rollouts, have pushed back hopes for what should eventually be a robust rebound.
The central bank for the 19 European Union countries that use the euro still has almost 900 billion euros left in its pandemic bond purchase program, set to run through March 2022. So analysts don’t expect an announcement of more support when the bank’s 25-member governing council holds its regular policy meeting.
Instead, bank President Christine Lagarde will likely reiterate that the bank is nowhere near withdrawing any of its extraordinary measures, even if inflation jumps later this year. Consumer inflation is expected to temporarily climb above 2% annually in the later part of the year.
But the bank says that will be the result of transitory factors such as the withdrawal of pandemic tax breaks and comparisons with an earlier period of very low oil prices — and not a reason to withdraw any of its efforts to keep credit cheap for companies, governments and consumers. Inflation in the eurozone was an annual 1.3% in March. The bank’s goal is close to but below 2%.
U.S. Federal Reserve Chair Jerome Powell has taken a similar view, saying that price increases later this year could be due to temporary factors and that the Fed would not begin raising rates until a recovery of jobs lost in the pandemic was “effectively complete” and that inflation appears “on track to run moderately above 2% for some time.”
The eurozone economy shrank by 6.6% last year and economists say it may have contracted in the first quarter of this year as well. Output is not expected to reach pre-pandemic levels until mid-2022, lagging well behind other major pillars of the global economy such as the US and China.
The U.S. could reach pre-pandemic output as early as this month, according to an April 14 forecast from the Conference Board, while China was the only major economy to grow in 2020. The U.S. rebound is being propelled by massive relief and stimulus spending by the federal government. European governments have also spent heavily on pandemic relief but their 750-billion euro recovery fund at the EU level will only starting paying out for digital and green projects this year.
One ECB board member, Klaas Knot from the Netherlands, has suggested the ECB could start scaling back pandemic bond purchases later this year in time to phase them out in March 2022. For now that position appears to be in the minority but could signal friction between stimulus advocates and skeptics when the scheduled end of the bond purchase stimulus draws nearer. The purchases are a way of pumping newly created money into the economy, a step which helps keep borrowing costs low.