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Chief economist update: ECB keeps it steady

They came, they deliberated, they...well...didn't do anything.

At its September 10 meeting, the European Central Bank's (ECB) governing council decided to keep interest rates unchanged - repo rate at 0.00%; marginal lending facility rate at 0.25%; deposit facility rate at -0.50% - continue to buy up to €1350 billion worth of debt under its  pandemic emergency purchase programme (PEPP), maintain net purchases under the asset purchase programme (APP) at a monthly pace of €20 billion, together with the purchases under the additional €120 billion temporary envelope until the end of 2020, and continue providing liquidity through its targeted longer-term refinancing operations (TLTRO III).

This made sense given the positive tweak in the latest ECB staff macroeconomic projections for the single currency region.

The September forecasts show Eurozone GDP contracting by 8% in 2020 - better than the 8.7% slump predicted in June. Growth projections for the year 2021 and 2022 were unchanged at 5% and 3.2%, respectively.

Euro area economic growth dropped by 14.7% in the year to the June quarter, that followed a 3.2% decline in the March quarter and a 1% expansion in December 2019.

The ECB staff maintained its 2020 HICP inflation forecast at 0.3% but lifted it to 1% (from 0.8%) for 2021 and unchanged at 1.3% the year after. Preliminary estimates show Eurozone inflation falling by 0.2% in the year to August after rising by 0.4% in the previous month.

The ECB's decision was less dovish than financial markets and economists expect, especially given the renewed appreciation in the euro currency - to which ECB president Christine Lagarde explained that while it was discussed the bank does not target the exchange rate. The euro has appreciated by 5.8% against the US dollar this year to date and by 11.1% from the 2020 low recorded on March 20

There are certainly downside risks to these forecasts in light of the resurgence of cases of infections in and renewed restrictions in the region. But, the ECB staff has already pencilled these into its projections.

"The baseline rests on a number of critical assumptions concerning the evolution of the pandemic. The resurgence of infections seen in some European regions in recent weeks is assumed to broaden and intensify over the next few quarters, requiring a continuation of containment measures and/or behavioural changes by economic agents. By virtue of the experience gained on how to deal with the pandemic, these responses are assumed to become more efficient, implying lower economic costs than in the initial wave."

Read our full COVID-19 news coverage and analysis here.

Read more: ECBEuroUSChristine LagardeEuropean Central BankEurozone GDP
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