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ECB Leaves Monetary Stimulus Unchanged as It Assesses Pandemic's Economic Pain -- 2nd Update

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07/16/2020 | 09:20am EDT

By Tom Fairless

FRANKFURT -- The European Central Bank left its monetary stimulus unchanged on Thursday, pausing to assess the economic pain eurozone businesses and consumers are still suffering as they emerge from lengthy lockdowns.

Europe was hit early and hard by the coronavirus pandemic, but muscular intervention by governments and the ECB have so far helped to curb infection rates and support consumer spending and growth. The ECB alone unveiled around $3 trillion of stimulus measures in recent months, putting its crisis response on par with the Federal Reserve's.

The ECB said in a statement Thursday that it would continue to purchase EUR1.35 trillion ($1.54 trillion) of government and corporate debt through June 2021 under its Pandemic Emergency Purchase Program, or PEPP. The bank also left its key interest rate unchanged at minus 0.5%.

"Economic activity improved significantly in May and June from its trough in April, alongside the ongoing containment of the virus and the associated easing of the lockdown measures," ECB President Christine Lagarde told reporters.

Ms. Lagarde, a former International Monetary Fund managing director and French finance minister, needs to steer the region's economy out of its deepest crisis in decades, just as a faster rebound in Northern Europe triggers calls for an early end to easy money.

ECB officials including Ms. Lagarde have signaled recently that they think Europe's economy is on the mend. Confidence among businesses and consumers is rebounding sharply, and retail spending is surging, supported by massive government-funded job-furlough schemes.

However, the recovery is expected to be uneven, tilted toward the richer North, and it depends heavily on costly government support and a rebound in exports. The latter seems unlikely as key trading partners like the U.S. continue to struggle with surging coronavirus infections.

Eurozone goods exports rose around 8% in May from the previous month, but they were still down more than a quarter from their February levels, data from the EU's statistics agency showed Thursday.

The economies of Italy, France and Spain are expected to shrink around 11% this year, roughly twice as much as Germany's, the European Commission, the EU's executive arm, wrote in a report this month. Italy's public debt is expected to rise above 150% of economic output this year, more than double the level in Germany, according to the International Monetary Fund.

Investors will pay close attention to Ms. Lagarde's description of the economic outlook and of current discussions within the ECB's 25-member rate-setting committee.

Some ECB officials have started to worry publicly in recent weeks that the bank's massive stimulus, billed as a temporary response to the pandemic, could drag on for years. Jens Weidmann, president of Germany's conservative Bundesbank, has noted that Germany's economy is recovering, while arguing that the ECB's stimulus should be withdrawn as the pandemic recedes.

The trouble is, the ECB probably can't step back from government bond markets without driving up borrowing costs for weaker countries like Italy, threatening a repeat of the region's sovereign debt crisis.

Ms. Lagarde might call on European Union governments to do more to help out. EU leaders will gather on Friday and Saturday to try to thrash out a multibillion-euro stimulus package aimed at supporting growth. Some EU leaders have suggested that a deal is out of reach, however, amid resistance from fiscally conservative countries like the Netherlands.

In her news conference, Ms. Lagarde urged EU leaders to quickly agree on a package.

"An ambitious and coordinated fiscal stance remains critical," she said.

If EU governments can't agree, that could increase pressure on the ECB to do more. Some analysts expect the central bank to roll out fresh stimulus later this year.

"Radical policy action has reduced the risk of a debt crisis for now, but only thanks to measures which are supposed to be temporary," said Andrew Kenningham, chief Europe economist with Capital Economics in London.

"Many things still need to go right if Italy is to avoid having to restructure its public debt within the coming decade or so, and that would again raise fears of a eurozone breakup."

Paul Hannon in London contributed to this article

Write to Tom Fairless at tom.fairless@wsj.com


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