ECB leaves policy unchanged as Europe returns to lockdown

The European Central Bank (ECB) left its monetary policy unchanged on Thursday, but warned the outlook for the European economy was worsening and laid the groundwork for possible fresh stimulus in December.

The ECB’s governing council on Thursday held the eurozone’s interest rate at 0% and kept the deposit rate at -0.5%. The central bank left its €1.35tn (£1.23tn, $1.60tn) pandemic-bond buying programme unchanged, as it did with its €20bn-a-month non-emergency asset purchase programme and its re-financing operations.

Ahead of the announcement, analysts had said monetary policy changes were not likely. The economic outlook for the eurozone has worsened significantly since the ECB’s September meeting but private sector economists said the central bank would likely wait until December to launch any additional stimulus measures, allowing it more time to gather information.

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The governing council confirmed this, saying it would “recalibrate its instruments, as appropriate, to respond to the unfolding situation” once new forecasts were made in December.

“We will be looking at everything,” ECB President Christine Lagarde said during a press conference. “Don’t assume it will be one instrument — we’re going to look at all of them.”

Policy makers acknowledged that risks to the eurozone economy were now “clearly tilted to the downside,” reflecting the worsening outlook for both the pandemic and the eurozone economy since the governing council last met.

“The euro area economic recovery is losing momentum more rapidly than expected after a strong yet partial and uneven rebound in economic activity over the summer months,” Lagarde said.

“The rise in COVID-19 cases and the associated intensification of containment measures is weighing on activity, constituting a clear deterioration in the near-term outlook.”

Data published at the start of the month showed prices continue to fall across the eurozone, adding pressure on the ECB to act. The central bank targets inflation of around 2%.

Lagarde said deflation was likely to persist until early next year due to weak consumption and depressed oil prices.

Meanwhile, COVID-19 cases have been rapidly spiking across Europe. France and Germany, continental Europe’s two biggest economies, announced new lockdowns on Wednesday evening. Switzerland has also ramped up restrictions.

“We expect the month of November to be very negative,” Lagarde said, warning that fourth quarter GDP growth would likely undershoot the central bank’s forecasts.

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Earlier on Thursday economists at Morgan Stanley said the eurozone economy could shrink in the fourth quarter, constituting a “double dip” hit from the COVID-1 pandemic.

The ECB’s governing council said it would “carefully assess the incoming information, including the dynamics of the pandemic, prospects for a rollout of vaccines and developments in the exchange rate.”

Analyst said additional stimulus at the end of the year was now likely.

“The door for December action is wide open,” said Carsten Brzeski, global head of macro at ING.

However, several suggested that the ECB’s options would be limited and may not be effective.

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

Aaron Anderson, senior vice president of research at Fisher Investments, said: "There simply is not much central bankers can do at this point to drive a pickup in economic activity.”

The euro was little changed against the dollar (EURUSD=X) and pound (GBPEUR=X) in the wake of the statement.

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