ECB signals faster pace of COVID-related bond buying

The European Central Bank will continue asset purchases under its €1.85 trillion ($2.2 trillion) pandemic emergency purchase program at a "significantly higher pace" than before due to financing conditions and the inflation outlook.

The ECB's governing council expects the pace of its purchases to step up for the coming quarter, the central bank said Thursday.

Following a strong rebound in the third quarter of 2020, eurozone real GDP contracted by 0.7% in the three months ended Dec. 31. Real GDP is estimated to have declined by 6.6% in 2020, Christine Lagarde, ECB president, said in a news conference.

Incoming economic data, surveys and high-frequency indicators also point to "continued economic weakness in the first quarter of 2021 driven by the persistence of the pandemic and the associated containment measures. As a result, real GDP is likely to contract again in the first quarter of the year," she said, although vaccination programs across Europe are expected to result in a rebound.

Addressing inflation, Ms. Lagarde said eurozone figures increased sharply to 0.9% in January and February, up from -0.3% in December. The increase reflects a number of factors including higher energy price inflation.

Based on oil futures prices, headline inflation is likely to increase in the coming months, although volatility is expected throughout the year.

And once the impact of the pandemic fades, "the unwinding of the high level of slack, supported by accommodative fiscal and monetary policies, will contribute to a gradual increase in inflation over the medium term," Ms. Lagarde said.

The ECB left interest rates unchanged.

The central bank "succeeded in 'out-doving' the market's expectations" at first assessment, Andrew Mulliner, portfolio manager at Janus Henderson, said in an emailed comment. "Digging a little deeper and one can sense that the ECB is squeezing as much juice from its monetary-policy lemon, which is both encouraging as well as indicative of the limited room to manoeuvre they currently have."

Silvia Dall'Angelo, senior economist at the international business of Federated Hermes, said in a separate comment that risks to the economic outlook remain skewed to the downside, while important challenges lie ahead. "In the eurozone, vaccine programmes are proceeding slowly amid difficulties in securing enough doses, and fiscal disbursement from the Resilience and Recovery Fund will start in the summer at the earliest. In addition, higher yields in the U.S. might continue to spill-over to the eurozone."

Ms. Dall'Angelo said the ECB therefore needs to maintain an "easing bias and remain open to fresh action down the line to show its commitment to maintaining accommodative financing conditions and/or to try to make up for the potential inadequacy of fiscal stimulus."