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Worsening pandemic poses ‘serious risks’, ECB’s Lagarde warns

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(FILES) In this file photo taken on January 23, 2020 Christine Lagarde, President of the European Central Bank (ECB) addresses a news conference following the meeting of the governing council of the ECB in Frankfurt am Main, western Germany. – European Central Bank president Christine Lagarde warned governments on October 12, 2020 against pulling pandemic support schemes too quickly as eurozone economies struggle to recover from the coronavirus crisis. (Photo by Daniel ROLAND / AFP)

European Central Bank chief Christine Lagarde warned on Thursday that the pandemic still poses “serious risks” to the eurozone economy as concerns grow about new virus variants and sluggish vaccination campaigns.

The Frankfurt institution’s governing council held back from tweaking its ultra-loose monetary policy at its first meeting of the year, having already ramped up stimulus in December.

Lagarde stressed that “ample monetary stimulus” remained essential to steer the 19-nation currency club through the Covid-19 upheaval, and that the ECB stood ready to do more as needed.

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“The pandemic continues to pose serious risks to public health and to the euro area and global economies,” she told a press conference held online because of virus precautions.

The start of mass vaccination drives in the European Union was “an important milestone”, she said, but the rollout has got off to a bumpy start in many nations.

The emergence of more contagious virus variants in Britain and South Africa has added to nervousness, at a time when many countries are already struggling to bring down Covid-19 cases.

Europe’s top economy Germany this week extended its partial lockdown until February 14, and Chancellor Angela Merkel has not ruled out border checks to slow the spread of the new variants.

France and Spain have tightened their evening curfews, while non-essential shops and leisure facilities are closed across much of the continent.

The latest virus setbacks “are disrupting economic activity,” Lagarde said, noting that the services sector was hit especially hard.

“The intensification of pandemic poses some downside risks to the short-term economic outlook,” she added.

The ECB in December forecast 3.9 percent growth for 2021, after an estimated contraction of 7.3 percent in 2020.

Lagarde said the ECB’s forecasts “remain valid” for now, as they took into account lockdowns persisting through the first quarter coupled with a gradual start to vaccination.

The former French finance minister also reiterated a long-standing plea for European governments to help support the ECB’s efforts through fiscal policy.

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She called on member states to speed up the ratification of a recently agreed 750-billion-euro recovery fund, saying it had a “key role” to play in financing the regions’ bounce-back.

Euro headache
Under Lagarde, the ECB took unprecedented steps last year to cushion the impact of Covid-19 on the euro economy.

Its biggest weapon is a pandemic emergency bond-buying scheme, known as PEPP, that was in December topped up by 500 billion euros to reach a total envelope of 1.85 trillion euros. The scheme was also extended to March 2022.

The bank has also offered ultra-cheap bank loans and held interest rates at historic lows.

The goal of the measures is to keep borrowing costs low to encourage spending and investment in the 19-nation currency club, in a bid to boost growth and inflation.

But eurozone inflation has stayed stubbornly low for years and even turned negative in 2020.

By the ECB’s own estimates, price growth will gradually inch up to 1.4 percent by 2023, still far off the bank’s target of just under two percent.

In December, inflation stood at minus 0.3 percent.

Analysts say inflation could bound higher later this year, powered by pent-up consumer demand once lockdowns start easing.

But any boost is expected to be short-lived, they cautioned.

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Lagarde said inflation was “likely to increase in the coming months”, partly also due to the end of a temporary sales tax cut in Germany from January.

But she said “underlying price pressures are expected to remain subdued due to low demand in tourism and travel sectors, and the appreciation of the euro against the dollar.”

The single currency has risen by more than 10 percent against the greenback since late February, complicating ECB efforts to push up inflation.

A stronger euro makes imports cheaper, keeping a lid on consumer prices, while exports become less competitive, hurting growth prospects.

Lagarde, a former International Monetary Fund chief, said the ECB was monitoring exchange rates “very carefully”.

“The currency remains a concern for the ECB as it could add to deflationary pressures and hurt the recovery,” said HSBC economist Fabio Balboni.

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