European Central Bank leaves pandemic stimulus unchanged

The bank’s bond purchase program drove down longer-term borrowing costs for businesses as they weathered shutdowns and for governments as they spent more on pandemic support. It had been slated to run at least through March or until the bank deemed the crisis phase of the pandemic over, though rising inflation has sharpened questions about whether the exit should come sooner rather than later.

Lagarde said much of the surge in prices is tied to comparisons with low prices during the pandemic, recently higher fuel costs and demand outpacing supply as the economy reopens. She said she expected all three to be temporary.

She said that “while the current phase of higher inflation will last longer than originally expected, we expect inflation to decline in the course of next year.” The economy still needed support from the central bank, Lagarde said, given that almost two million fewer people were employed than before the pandemic and three million were still in government furlough programs that help companies keep workers by paying part of their salary.

Annual inflation in the group of countries using the euro hit 3.4% in September, the highest since 2008. Lagarde said she and the council had done “a lot of soul-searching” over the analysis that inflation would fade but were convinced it was correct.

Analysts say the bank will likely avoid an abrupt cut-off in pandemic support, for instance by shifting some bond purchases to another, pre-existing program. That could be decided at the Dec. 16 meeting.

The announcement that the pandemic stimulus would end as scheduled — rather than leaving it open — was seen by Frederik Ducrozet, global macro strategist at private bank Pictet, as a mild shift in stance. While tapering the support “shouldn’t be a surprise to any observer, the pre-commitment was unusually strong, in a possible concession” to stimulus skeptics on the council, Ducrozet said by email.

Central banks usually raise interest rates and dial back stimulus efforts to combat rising prices. But the European Central Bank says it foresees inflation falling to 1.5% by 2023, well below its goal of 2%, and market expectations of a small interest rate increase by the end of next year isn’t in line with its outlook.

Meanwhile, the Bank of Canada decided Wednesday to halt its bond purchase program, while the central bank of Brazil raised interest rates for the sixth straight meeting this week and indicated rates would continue going up.

The U.S. Federal Reserve has indicated it could announce a reduction in the pace of its monthly bond purchases as soon as November, though interest rate increases would be “premature,” according to Chairman Jerome Powell. The Bank of England has signaled it is getting ready to raise rates to combat inflation.

Lagarde said comparisons to other central banks weren’t relevant, because some of them were already over their inflation target or were in countries with particular economic strengths, such as commodity exporters.

The bloc of countries using the euro has not yet reached its pre-pandemic level of output, unlike the U.S., which has seen a robust recovery following more extensive government spending.

The European Central Bank made no change to interest rate benchmarks, which remain at record lows. The rate for European Central Bank lending to banks is zero, while the rate on deposits left overnight by banks is minus 0.5%, meaning banks pay to deposit the money — a penalty rate aimed at pushing them to lend the funds instead.