ECB's Lagarde warns Delta variant casting 'shadow' over Europe's recovery

·Senior City Correspondent, Yahoo Finance UK
·3 min read
President of the European Central Bank Christine Lagarde in Brussels, Belgium. Photo: Thierry Monasse/Getty Images
President of the European Central Bank Christine Lagarde in Brussels, Belgium. Photo: Thierry Monasse/Getty Images

European Central Bank (ECB) President Christine Lagarde has warned that the Delta variant of COVID-19 is casting "a shadow" over Europe's economic recovery.

"The recovery in the eurozone economy is on track," Lagarde said during a press conference on Thursday. "But the pandemic continues to cast a shadow, especially as the Delta variant constitutes a growing source of uncertainty.

"The Delta variant of the coronavirus could dampen the recovery in services, especially in tourism and hospitality."

Lagarde cited the spread of the Delta variant as a key reason for maintaining the ECB's ultra loose monetary policy. Delta cases are rising sharply in the UK and rising in parts of continental Europe.

"The eurozone economy is rebounding strongly but the outlook depends on the course of the pandemic and the pace of vaccinations," Lagarde said.

The ECB left eurozone interest rates unchanged on Thursday and signalled they were likely to stay that way for some time. In a statement around lunchtime, the central bank said it would keep the eurozone's refinancing rate at 0%, its marginal lending rate at -0.25%, and its deposit rate at -0.50%.

The bank revised its forward guidance, signalling that rates were likely to remain at rock-bottom levels for some time.

The governing council said it expects rates were set to stay where they are "until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon". At the moment, "the medium-term outlook for inflation is still well below the Governing Council’s target," policymakers said in a statement. 

Inflation is currently running at 1.9% in the eurozone, down from 2% in May. Lagarde said inflationary pressures appeared to be "mostly temporary."

The governing council stressed its "commitment to maintain a persistently accommodative monetary policy stance" and said they could tolerate "a transitory period in which inflation is moderately above target".

The central bank kept other monetary policy tools on hold, in line with market expectations. The Pandemic Emergency Purchase Programme (PEPP) was maintained at €1.85tn (£1.6tn, $2.2tn) and the current pace of purchases reaffirmed. The asset purchase programme was kept at €20bn per month.

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July's statement is the first monetary policy announcement since the ECB's recent strategy review, which saw a change in wording to the central bank's key inflation targeting policy.

"The new strategy has set the inflation target from ‘below, but close to 2%’ to ‘2%’ with a commitment to symmetry, meaning that ‘the Governing Council considers negative and positive deviations from this target as equally undesirable’, however, temporary or transitory deviations from the target will be tolerated," said Carsten Brzeski, head of macro at ING.

"The new strategy can be interpreted in two ways. It is either just an official formalisation of what the ECB has been doing over the last few years anyway or it is a step towards more dovishness as 2% implies a more resolute effort, leaving less flexibility than ‘below but close to’."

Thursday's pronouncements confirm the dovish interpretation of the changes.

Watch: Will interest rates stay low forever?

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