European Central Bank holds steady on $2.25 trillion bond-buying package after stepping up stimulus in December

• The European Central Bank announced it would keep interest rates at record lows and bond-buying at €1.85 trillion ($2.25 trillion).
• The ECB said it had "decided to reconfirm its very accommodative monetary policy stance".
• It comes after it boosted bond-buying by €500 billion in December to support the Eurozone.

The European Central Bank held interest rates at their record-low level and kept bond-buying steady on Thursday, taking a breather after increasing support to the coronavirus-ravaged Eurozone economy in December.

The ECB's governing council kept its main deposit rate at -0.5%, meaning banks are charged to keep money with the central bank, encouraging them to lend it out.

After increasing support last month, the ECB kept its key bond-buying scheme - the pandemic emergency purchase programme (PEPP) - at €1.85 trillion ($2.25 trillion).

Yet the ECB signalled on Thursday that it will not necessarily use the whole package. "If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full," its statement said.

The euro was up 0.3% against the dollar in the wake of the decision, to $1.214.

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Analysts expected the ECB to hold fire at its January meeting after it ramped up its bond-buying programme by €500bn in December and pushed back the end of the PEPP until at least March 2022.

Coronavirus cases have surged across Europe since the autumn, forcing countries to lock down their economies once again. Germany on Tuesday extended its lockdown until the middle of February and introduced stricter rules.

At a press conference following the decision, ECB president Christine Lagarde said new cases and restrictions "have likely led to a decline in activity in the fourth quarter of 2020 and are also expected to weigh on activity in the first quarter of this year".

Yet she said the Bank's monetary policy is currently "very accommodative". And she stressed there were a number of "positives" including the rollout of vaccines, the Brexit deal, and the agreement of the €750 billion EU recovery fund.

Lagarde said inflation is likely to "remain subdued" for the foreseeable future due to weak demand, low wage pressures, and the rise in the euro. Yet she said the ECB expected inflation to pick up from December's -0.3% reading due to increases in energy prices.

The ECB boss urged Eurozone governments to keep spending to support their economies. "The situation is sufficiently uncertain that fiscal [support] needs to be continued at the national and European level," she said.

Jai Malhi, strategist at JPMorgan Asset Management, said: "The ECB held policy steady today, hoping that its measures implemented in the December meeting alongside the EU recovery fund rollout, will be enough to support the economy until the outlook brightens.

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"There is no doubt however that Lagarde faces a daunting task in returning inflation to [the 2%] target from its current lull. The recent strength of the euro could make that task even harder.

"The euro strengthening further over the course of the year could prove to be the catalyst for further action from the ECB and may even bring about the discussion of deeper negative interest rates."

Claus Vistesen of consultancy Pantheon Macroeconomics noted that Thursday was the first time the ECB had officially said it may not use all of the PEPP.

"This is a slight hawkish tilt in the communication, and also one which could become a target for markets," Vistesen said.

"After all, the ECB is now saying that if yields remain as low as they are now, there isn't a reason to deploy the PEPP in full. We wouldn't put it past markets to test the central bank on this."

Yet Vistesen noted that Lagarde also said the ECB could expand the PEPP if necessary.