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The European Central Bank has raised its growth and inflation projections for this year and next as the euro zone economy started to roar back to life after over a year of restrictions to curb the coronavirus pandemic.

ECB President Christine Lagarde also said the ECB saw risks to growth as “broadly balanced”, a shift away from the ECB’s long standing assessment of risks as tilted to the downside.

In what it describes as the baseline scenario, the ECB expects GDP to expand by 4.6% this year, above the 4% seen in March, while growth next year is seen at 4.7% against the ECB’s previous 4.1% projection.

Its inflation forecast for this year was raised sharply, mostly because of higher commodity prices.

But consumer price growth beyond 2021 is seen remaining well short of the ECB’s almost 2% target, the fresh figures show.

Inflation is now seen averaging 1.9% this year, above the 1.5% projected in March, while in 2022 it is seen at 1.5%, against an earlier projection for 1.2%.

Christine Lagarde said underlying inflation was expected to increase gradually but that price pressures would remain subdued and slack in the economy would keep inflation below the ECB’s target of just under 2% up to 2023.

She said the ECB expected economic activity to accelerate in the second half of 2021 but that the course of the pandemic and responses to it would continue to dictate the pace.

Inflation would rise further in the second half of the year before falling back as transitory factors fade, Lagarde added.

Earlier, the European Central Bank said it would continue to run its emergency bond purchases at a higher pace than at the beginning of the year, fearing that any retreat could sharply raise borrowing costs and smother a long delayed recovery.

Just emerging from a Covid-induced double-dip recession, the euro zone economy has relied on unprecedented ECB stimulus.

Policymakers have made clear that they would rather err on the side of caution when clawing back accommodation.

“The Governing Council expects net purchases under the Pandemic Emergency Purchase Programme (PEPP) over the coming quarter to continue to be conducted at a significantly higher pace than during the first months of the year,” the ECB said.

The ECB has bought around €80 billion worth of debt per month under its Pandemic Emergency Purchase Programme this quarter, up from levels early this year but below their peak at the start of the crisis.

Maintaining its long-standing guidance, the ECB said that its €1.85 trillion PEPP would last until March 2022 and it reserved the right to buy less than this quota or increase it as needed to “maintain favourable financing conditions”.

“The envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation,” the ECB said.

With today’s decision, the ECB’se interest rate on its main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively.

It also maintained its guidance that it would hold or cut this rate until inflation “robustly” converges with its target of close to – but below, 2%.

Article Source – ECB lifts euro zone growth and inflation projections – RTE

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