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ECB rates on hold; Lagarde sees significant, uneven recovery

ECB President Christine Lagarde drew the line at buying debt directly from euro zone governments and poured cold water on the notion of "helicopter money" drops for households.

The European Central Bank left policy unchanged on Thursday, as expected, scrutinising instead the effectiveness and any unwanted side-effects of its crisis-fighting measures.

Following are highlights of ECB President Christine Lagarde’s comments at a post-policy meeting press conference.

Incoming information … signals a resumption of euro area economic activity, although the level of activity remains well below the levels prevailing before the coronavirus pandemic, and the outlook remains highly uncertain.

Both high-frequency and survey indicators bottomed out in April and showed a significant, though uneven and partial, recovery in May and June alongside the ongoing containment of the virus and the associated easing of the lockdown measures.

Actual and expected job and income losses and the exceptionally elevated uncertainty about the evolution of the pandemic and the economic outlook continue to weigh on consumer spending and on business investment.

Headline inflation is being dampened by lower energy prices and price pressures are expected to remain very subdued on account of the sharp decline in real GDP growth and the associated significant increase in economic slack.

Uncertainty over the scale of the rebound remains high … The balance of risks remain on the downside.

Ample monetary stimulus remains necessary to support the economic recovery and to safeguard medium-term price stability.

We have slowed down a little bit the pace of purchases. Unless there were significant upside surprise (to economic outlook), our baseline remains we will use the entire envelope of PEPP.

We strongly welcome the European Commission’s EU next generation proposal. It will need to be firmly rooted in sound structural policies.

We have front-loaded (PEPP) purchases – just to remind you, we have purchased over 360 billion euros in the first couple of months and that was at the end of June, effectively.

It is effective, it is adequate and it is working. We have not discussed that (altering PEPP programme) … We do not see a need to revisit.

During this meeting of the Governing Council, we really spent a good deal of time looking at the economic circumstances … And really, seeing the developments in the economy, we really felt that we were in a good place at the moment.

We have taken into account the risk of a second wave.

Financial market sentiment has improved.

Compared with the time of the PEPP announcement, euro investment-grade corporate spreads declined by more than 80 basis points while high-yield spreads declined by more than 250 basis points, so we see significant improvements. But having said that we are not exactly back to where were before the pandemic started.

For example, government bond yields are still higher in most jurisdictions than they were before the pandemic and this is highly relevant from a monetary policy stance.

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Kyriacos Nicolaou

Cyprus Business Now

Kyriacos Nicolaou