The meeting of the ECB’s Governing Council for July was uneventful as the central bank made no changes to its current monetary policy stance.
This was very much in line with market expectations as it had only last month announced an increase to its Pandemic Emergency Purchase Programme from €750bn to €1.35 trillion.
It kept its key interest rates unchanged too -- with the deposit rate maintained at -0.5%, a level it has been at since September 2019.
In its description of the eurozone economy’s recent performance, the ECB acknowledged that there has been some signs of improvement. It noted that some key macro indicators bottomed out in April.
Since the beginning of May, there has been an easing of the lockdown restrictions, which has enabled an economic recovery to get underway. This was reflected in retail sales rebounding by 17.8% in May, while industrial production rose by 12.4% in the same month.
In terms of more recent survey data, the Purchasing Manager Indices continued their improvement from May into June.
The composite index was still below the 50 level that separates growth from contraction, but this may be due to respondents comparing activity to pre-Covid norms. The manufacturing and service sector indices have moved higher across the eurozone.
Meanwhile, developments on the labour market front have been relatively benign given the scale of the crisis. The jobless rate for the eurozone edged up in May, but only to 7.4% from 7.3%. This partially reflects technicalities surrounding the measurement of unemployment, but also the relative success of furloughing schemes in preventing mass lay-offs.
However, as government supports are removed we would expect lay-offs to rise as the pandemic prompts permanent business closures.
Overall though, the tone from the ECB was one of caution and ongoing concern regarding the economic outlook. It emphasised that despite some pick-up, activity has been uneven and not broad-based, with activity remaining well below normal levels, while the outlook remains highly uncertain.
In its most recent update to its economic forecasts, released at the June meeting, the ECB’s central projection is for an unprecedented contraction of 8.7% in eurozone GDP this year.
The ECB staff forecasts see GDP growth rebounding by 5.2% next year and rising by 3.3% in 2022. This indicates that the central bank anticipates that it is going to take the eurozone economy some time to recover the fall in output that occurred in the first half of this year.
The ECB continues to be of the view that the balance of risk to its forecasts is to the downside. Indeed, in a more severe scenario, where tough coronavirus containment measures have to remain in place for a longer period of time, the ECB estimates that GDP could fall by as much as 12.6% in 2020.
Not surprisingly then, the Governing Council expects that ample monetary policy stimulus will continue to be required to support the recovery in the eurozone economy. In other words, official interest rates will remain at their current level or could be moved lower, while there could be additional increases to its bond-buying programme.
In terms of market expectations, futures contracts are looking at the possibility that the ECB could lower the deposit rate by between five and 10 basis points in 2021. Meanwhile, the first 10 basis point hike in the deposit rate is not envisaged to happen until 2024.