Europe leaves stimulus running hot ahead of recovery

FILE - In this Feb.14, 2021 file photo the sun is about to rise behind the buildings of the banking district in Frankfurt, Germany. The European statistics agency Eurostat released monthly inflation figures Tuesday.(AP Photo/Michael Probst, file)
FILE - In this Feb.14, 2021 file photo the sun is about to rise behind the buildings of the banking district in Frankfurt, Germany. The European statistics agency Eurostat released monthly inflation figures Tuesday.(AP Photo/Michael Probst, file) (Copyright 2021 The Associated Press. All rights reserved)

FRANKFURT – The European Central Bank left its key pandemic support for the economy running full blast even as the economy shows signs of recovery thanks to lower virus cases and fewer restrictions on activity in the 19 countries that use the euro currency.

ECB President Christine Lagarde was at pains to underline that there was no discussion at Thursday's policy meeting about dialing back support in coming months.

Speaking at a news conference after the decision by the bank's 25-member governing council, Lagarde said the central bank expects “a sizeable improvement” over the second quarter of the year. But she cautioned that the rebound “continues to depend on the course of the pandemic and how the economy responds after reopening.”

Lagarde said a discussion about reducing stimulus would be “too early, premature" at this point.

While economic activity is picking up, Europe is not expected to reach pre-pandemic levels of output before 2022, well behind the US and China. Economic output was minus 0.3% in the first quarter; the ECB foresees a rebound over the remaining months of the year that would take growth to 4.6% for the year.

The slower recovery could mean Europe will lag the U.S. Federal Reserve in phasing out its pandemic stimulus. Several Fed officials have said that as the economy recovers, the U.S. central bank will eventually have to reassess its stance. Currently it is purchasing $120 billion in bonds each month. The next two-day meeting of Fed policymakers begins Tuesday.

Lagarde downplayed inflation that has ticked higher recently, saying it was the result of temporary factors and an increase energy prices. She said there was still “significant economic slack” holding back underlying inflationary pressures and that the bank was concerned about post-pandemic “scarring” of the economy due to changed consumption habits and loss of jobs leading to workers needing training in new skills.

Holger Schmieding, chief economist at Berenberg bank in London, said that the doves, or stimulus supporters on the council, had prevailed, not a surprise given recent pro-stimulus comments from bank officials.