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(Z1) Off Lows, But Remains Weak


Still Vulnerable


Bullish Price Sequence

By Luke Heighton
     FRANKFURT (MNI) - The European Central Bank left its policy stance
unchanged Thursday citing early signs of recovery with President Christine
Lagarde expecting to use the full EUR 1.35 trillion PEPP envelope, in contrast
to recent statements by some Governing Council members.
     Lagarde said the whole PEPP package is likely needed in the absence of
significant upside surprises. The ECB's decision said the recovery comes with
concerns over labor markets, high levels of household saving and uncertainty,
and weakness in foreign demand.
     The ECB would "never let capital key convergence impair the efficiency" of
its Covid-19 monetary policy response, Lagarde said, referring to rules that
weight sovereign bond purchases according to the population and GDP of each
member state. 
     Raising the tiering multiplier for banks' deposits with the ECB was not
discussed at the latest Council meeting, Lagarde said, adding that although the
current regime can be changed, "we don't see at the moment any particular reason
to do so."
     High frequency indicators showed a "significant, though uneven and partial"
recovery in May and June, Lagarde said, having bottomed out in April. Growth is
still weighed down by job and income losses and uncertainty around the
coronavirus pandemic.
     Euro area activity is expected to rebound in Q3 as lockdowns are further
eased, Lagarde said, though uncertainty about the "overall speed and scale of
the rebound remains high," and growth risks remain tilted to the downside.
     Recent spikes in U.S. infection rates were a concern, she said, but their
possible effects had been taken into account in the ECB's various growth
     Strong and coordinated fiscal action remains "critical" and should be
agreed quickly, Lagarde said. 
     While pandemic measures "should as much as possible be targeted and
temporary in nature," Lagarde said, fiscal action should be withdrawn cautiously
to avoid a "cliff edge" and risks from tightening of bank financing conditions.
     The Governing Council statement drew attention to the "very high" take-up
of funds under the latest operation of its targeted longer-term refinancing
operations (TLTRO-III), and stressed their role in supporting bank lending to
firms and households.
     In order to reach its full potential, Lagarde said, the European Union's
Recovery and Resilience Facility "will need to be firmly rooted in sound
structural policies conceived and implemented at the national level."
     Lagarde also confirmed the ECB's monetary policy strategy review will
recommence in September and is expected to extend into the second half of 2022.
--MNI Frankfurt Bureau; +49-69-720-146; email:
--MNI London Bureau; +44 203 865 3829; email:
--MNI Ottawa Bureau; +1 613-314-9647; email:
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