Risks surrounding the euro area growth outlook remain tilted to the downside, but are now less pronounced, the European Central Bank President Christine Lagarde said Thursday.
“The news about the prospects for the global economy, the agreement on future EU-UK relations and the start of vaccination campaigns is encouraging, but the ongoing pandemic and its implications for economic and financial conditions continue to be sources of downside risk,” Lagarde said in the introductory statement to her post-decision press conference.
Amid the resurgence in the coronavirus infections, economic activity is being disrupted in many countries, she noted. Services sector activity is being severely curbed, albeit to a lesser degree than during the first wave of the pandemic in early 2020, she said.
Weak demand and significant slack in labor and product markets suggest that inflation is set to remain very weak in the near term, the ECB chief said.
“Uncertainty remains high, including relating to the dynamics of the pandemic and the speed of vaccination campaigns,” Lagarde said.
“We will also continue to monitor developments in the exchange rate with regard to their possible implications for the medium-term inflation outlook.”
The bank expects economic output to continue to decline in the first quarter due to the resurgence in the Covid-19 infections and the consequent lockdown measures in several countries.
The recovery of the euro area economy should be supported by favorable financing conditions, an expansionary fiscal stance and a recovery in demand as containment measures are lifted and uncertainty recedes, Lagarde said.
The ECB expects headline inflation to increase in the coming months, given the current trend in energy prices and also supported by the end of the temporary VAT reduction in Germany.
That said, weak demand, notably in the tourism and travel-related sectors, as well as to low wage pressures and the appreciation of the euro exchange rate would mean underlying price pressures remain subdued.
Earlier on Thursday, the central bank left its key interest rates and quantitative easing measures unchanged and reaffirmed its willingness to adjust policy tools when needed.
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