ECB Economic Bulletin: Preserving Favourable Financing Conditions Essential

24 June, 2021

By David Barwick – FRANKFURT (Econostream) – Maintaining favourable financing conditions is an essential part of ensuring the recovery and restoring price stability, the European Central Bank said on Thursday, reiterating the introductory statement of June 10.

In its fourth economic bulletin of the year, the ECB said that the further increase in yields observed up to the last Governing Council meeting reflected a brighter outlook in part, but could translate into a premature generalised tightening of conditions that would threaten the recovery and inflation.

The bulletin noted signs of a ‘sizeable improvement in activity’ in 2Q; manufacturing remained ‘robust’, with the potential for supply constraints to ‘pose some headwinds in the near term’, whilst survey data pointed to a ‘strong recovery in services’.

Private consumption should show strength going forward and business investment was resilient, setting the stage for growth ‘to continue to improve strongly in the second half’, the ECB said. Global and domestic demand, along with monetary and fiscal policy, would provide medium-term support to the recovery.

Risks to growth were ‘broadly balanced’, the bulletin said, repeating word for word the summary of upside and downside risks contained in the introductory statement.

As for inflation, euro area HICP would climb further in the near term, mainly due to the restoration of the German VAT to its usual level, and then moderate from the beginning of 2022, the ECB said. Despite slightly firmer underlying inflation expected this year, weak wage developments and the stronger euro would limit the upside, it said.

‘When the impact of the pandemic fades, the unwinding of the high levels of slack will, supported by accommodative monetary and fiscal policies, contribute to a gradual increase in underlying inflation over the medium term’, according to the ECB.

Market indicators of inflation expectations continued to strengthen for the shorter and longer term, the ECB observed, attributing this to greater appetite for risk, anticipation of elevated post-pandemic consumer spending and fiscal stimuli.

Banks were continuing to benefit from favourable financing conditions, the ECB said, though ‘rising credit risk and low bank profitability may hamper banks’ ability to supply credit.’ The latest bank lending survey showed banks as perceiving higher risk and being less willing to take on risk, it said.

Moreover, how the pandemic would affect banks in the longer term remained uncertain, the ECB said. ‘All existing policy support measures remain essential in order to prevent that uncertainty from precipitating a broad-based tightening of financing conditions, amplifying the economic impact of the pandemic’, it said.