Thursday 29 October 2020 2:33 pm | Updated: Thursday 29 October 2020 2:54 pm

ECB leaves interest rates unchanged while Eurozone recovery loses momentum

The European Central Bank (ECB) left interest rates on hold at their record low level, but hinted at further support in December as the eurozone economy grapples with a second wave of coronavirus cases.

The central bank said it would “recalibrate its instruments” in response to the fresh wave of Covid-19 infections after its next meeting, but left its hallmark coronavirus bond-buying programme unchanged.

Risk ‘clearly tilted to the downside’

ECB President Christine Lagarde said the bloc’s economy was “losing momentum faster than expected” amid a second wave of coronavirus cases.

The “current environment of risk” for the bloc was “clearly tilted to the downside”, she said at a press conference following the announcement.

Lagarde added that there was “clear deterioration” in the near-term outlook due to “the recent resurgence of coronavirus cases and associated intensification of containment measures”.

‘Too early to say’ if economy will contract in fourth quarter

It is too early to say whether the bloc’s economy will shrink in the fourth quarter, she said.

Lagarde added that while data on third-quarter economic growth data may be better than expected, the fourth quarter is almost certain to be below forecasts, with November set to be “very negative”.

The ECB said it would “recalibrate its instruments, as appropriate, to respond to the unfolding situation and to ensure that financing conditions remain favorable to support the economic recovery and counteract the negative impact of the pandemic on the projected inflation path.”

Lagarde said that staff macroeconomic projections in December will allow the ECB to make a thorough assessment of how it should recalibrate its policy response.

The ECB’s main deposit rate will stay at -0.5 per cent – meaning lenders will be charged to deposit funds with the central bank.

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The central bank had been widely expected to leave rates unchanged and resist calls to introduce further stimulus having already unprecedented firepower in the spring, and instead pave the way to take further action at the next meeting of its governing council.

Seema Shah, chief strategist at Principal Global Investors, said it was unsurprising the ECB had so clearly flagged that it would take action at its December meeting as “the Euro area economic outlook has darkened meaningfully since their last meeting”.

“Unsurprisingly, the ECB didn’t want to leave any doubt that they stand ready to act, signalling that they will adjust their stimulus measures as needed once their new projections are ready in December,” she added.

Markets look to next ECB meeting

The ECB has set aside €1.35 trillion for bond purchases until mid-2021 and still has around €700bn of that cash to spare, giving it the means to keep markets calm without having to make a fresh commitment.

But with new restrictions being introduced across the continent to curb the spread of the virus, fears are mounting that the eurozone could slip back into recession as large parts of its services sector are shut down again.

The re-introduction of lockdown measures across the eurozone is also challenging the Bank’s view that the eurozone economy will grow back to its pre-crisis level by the end of 2022.

“Markets will now expect ‘something’ in December but the cupboard is running bare of policies that might actually have a strong impact,” said Melissa Davies, chief economist at Redburn.

“The ECB can cut rates and add to QE but we think something more dramatic is needed as the lack of eurozone fiscal union ties the central bank’s hands,” she added.

“Something radical is required…to stimulate confidence, spending and investment, and to potentially help manage the stubbornly strong euro.”