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European Central Bank holds fire ahead of crunch

The European Central Bank has decided to keep its policy unchanged. The market players look for clues on when its massive monetary stimulus might start to be wound down.Lagarde, President of European Central Bank said on Thursday that preserving favourable financing conditions over the pandemic period is essential to reduce uncertainty and bolster confidence, thereby underpinning economic activity and safeguarding medium-term price stability.

The bank plans to increase government bond purchases though still within the planned envelope of $2.2 trillion until March 2022. This is to address rising bond yields in the eurozone. The European Central Bank voiced its concerns with borrowing costs rising sharply for euro area governments before the economy had fully recovered from the coronavirus shock.As a result, data from Deutsche Bank showed the central bank purchased 74 billion euros in bonds in March, up from 53 billion and 60 billion euros in February and January.

The central ball also added that the Governing Council expects purchases under the PEPP over the current quarter to continue to be conducted at a significantly higher pace than during the first months of the year. It also suggested that it will keep buying more bonds in the coming months in comparison to the first few months of the year.

The Bank’s loose monetary policy stance is aimed at supporting the 19 euro area economies as they battle with the coronavirus shock. Many European nations have been forced to return to strict lockdowns after a third wave of infections over the Easter period, and there is a lot of uncertainty for the coming months.Incoming economic data, surveys and high-frequency indicators suggest that economic activity may have contracted again in the first quarter of this year, but point to a resumption of growth in the second quarter. There is an “overall environment of uncertainty” regarding the economic outlook.

The central bank’s policy mandate is to keep inflation close but below 2%. Current forecasts estimate that inflation will peak 2% in the last quarter of 2021, but come down throughout 2022. Market reaction was muted after the announcement, as it met analysts’ expectations of no further action. The ECB forecast in March a gross domestic product rate for 2021 of 4%, and 4.1% for 2022.

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