The European Central Bank warned today that a new surge in Covid-19 infections poses risks to the euro zone's recovery and reaffirmed its pledge to keep borrowing costs low to help the economy through the pandemic.
Having extended stimulus well into next year with a massive support package in December, ECB policymakers kept policy unchanged today.
The ECB is keen to let governments take over the task of keeping the euro zone economy afloat until normal business activity can resume.
But they warned about a new rise in infections and the ensuing restrictions to economic activity, saying they were prepared to provide even more support to the economy if needed.
"The renewed surge in coronavirus infections and the restrictive and prolonged containment measures imposed in many euro area countries are disrupting economic activity," ECB President Christine Lagarde said.
New lockdowns, a slow start to vaccinations across the 19 countries that use the euro, and the currency's strength will increase headwinds for exporters, challenging the ECB's forecasts of a robust recovery starting in the second quarter.
Christine Lagarde saluted the start of vaccinations as "an important milestone" despite "some difficulty" and said the latest data was still in line with the ECB's forecasts.
She conceded that the strong euro, which hit a two and a half year high against the dollar earlier this month, was putting a dampener on inflation and reaffirmed that the ECB would continue to monitor the exchange rate.
The euro has dropped 1% on a trade-weighted basis since the start of the year, but is up nearly 7% over the last 12 months.
Against the US dollar, that number rises to over 10%.
Opening the door for more stimulus if needed, Lagarde confirmed the ECB would continue buying bonds until "it judges that the coronavirus crisis phase is over".
She also kept a closely watched reference to "downside" risks facing the euro zone economy, which has been a reliable indicator that the ECB saw policy easing as more likely than tightening.
But she signalled those risks were less acute, in part thanks to the recent Brexit deal.
"The news about the prospects for the global economy, the agreement on future EU-UK relations and the start of vaccination campaigns is encouraging," Lagarde said.
"But the ongoing pandemic and its implications for economic and financial conditions continue to be sources of downside risk," she added.
Lagarde conceded that the immediate future was challenging but argued that should not impact the longer term.
"Once the impact of the pandemic fades, a recovery in demand, supported by accommodative fiscal and monetary policies, will put upward pressure on inflation over the medium term," Lagarde said.
Benign market indicators support Lagarde's argument. Stocks are rising, interest rates are steady and government borrowing costs are trending lower, despite some political drama in Italy.
There is also around €1 trillion of untapped funds in the Pandemic Emergency Purchase Programme (PEPP) to back up her pledge to keep borrowing costs at record lows.
The ECB has indicated it may not even need it to use it all.
"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," Lagarde said.
Recent economic history also favours the ECB. When most of the economy reopened last summer, activity rebounded more quickly than expected, indicating that firms were more resilient than had been feared.
Uncomfortably low inflation is set to remain a thorn in the ECB's side for years to come, however, even if surging oil demand helps put upward pressure on prices in 2021.
The ECB also today kept the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility unchanged at 0%, 0.25% and -0.5% respectively.
The overall quota for bond purchases under PEPP was also maintained at €1.85 trillion.
ECB President Christine Lagarde also today welcomed what she predicted would be "smart and inclusive" leadership of the US economy under Treasury Secretary-designate Janet Yellen.
"I wish my colleague and friend Janet Yellen the very best in her endeavour to lead the US economy in the way that she can only do it. Inclusively and very smartly," Lagarde told the ECB's post-policy meeting news conference.
Janet Yellen was Federal Reserve chair from 2014 to 2018.