European Central Bank says it ‘stands ready’ to act as Covid infections continue to rise

President of the European Central Bank (ECB) Christine Lagarde.

FRANCISCO SECO | AFP | Getty Images

LONDON — The European Central Bank kept interest rates unchanged Thursday, as euro nations continue to struggle with surging Covid-19 infections and subsequent lockdowns. However, it repeated that it “stand ready” to adjust its tools if the economic situation doesn’t improve.

The ECB’s main refinancing operations, marginal lending facility and deposit facility will remain at 0.00%, 0.25% and -0.50%, respectively, it said in a statement

The ECB stepped up its massive stimulus program in December to support the economic recovery in the region. Its Pandemic Emergency Purchase Programme was extended to March 2022, totaling 1.85 trillion euros ($2.25 trillion) in bond purchases. This allows euro zone governments to get cheaper rates when borrowing from public markets.

However, there are doubts over how the euro area will cope this year, after a 7.3% GDP (gross domestic product) drop last year, according to ECB forecasts.

The new year began with stricter social restrictions and national lockdowns in many of the 19 countries that share the single currency. Germany this week, for instance, extended a national lockdown until Feb. 14. The Netherlands has announced there will be a curfew starting next week. And France chose to intensify its curfew hours earlier this month, while Portugal will close schools from Friday.

There have been more than 16 million Covid-19 infections in the EU and more than 400,000 deaths so far, according to the European Centre for Disease Prevention and Control.

“The Governing Council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner,” the ECB said in a statement.

European leaders are hoping to accelerate vaccinations in the coming months as a way to contain the spread of the virus and its economic impact. The European Commission, the executive arm of the EU, has asked member states to vaccinate at least 70% of their adult populations by the summer.

Despite the troubled situation, the ECB has stuck with its growth forecasts for this year. Speaking at an event, earlier this month, central bank President Christine Lagarde said: “I think our last projections in December are still very clearly plausible.” In December, the bank estimated a 3.9% GDP rate for 2021, and 2.1% for 2022.

Dovish for a ‘long time’

“As the vaccination program gathers pace across the euro zone, the economy should begin to recover from the Spring,” Joseph Little, global chief strategist at HSBC Global Asset Management, said in a research note after the announcement.

“Despite the prospect of a re-invigorated recovery, the ECB is likely to remain dovish for a long time to come, as the economy is around 7% smaller than a year ago,” he added.

Many economists expect the ECB to keep its policy unchanged for the foreseeable future, even if lockdowns were to continue beyond March.

“Even if some of these downside risks materialise, the policy implications would be limited,” Andrew Kenningham, chief Europe economist at Capital Economics, said in an email, “particularly as the Bank appears to be resigned to missing its key policy target for a long time to come.”

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