The European Central Bank will continue to buy bonds and keep its interest rates deeply negative in an attempt to move the eurozone economy out of its persistent slow inflation pattern, its policymakers decided Thursday.
The ECB also said it was ready to tolerate a moderate and transitory overshoot of its inflation target since it believes a “persistent” policy is needed when rates are close to the lowest point at which cuts are effective – as today.
The orientation came two weeks after the ECB agreed on a new strategy that raised its inflation target to 2 per cent, abandoned a promise to keep price highs below that level and accepted that they may even temporarily overcome it. It was the first strategy change in almost two decades.
Following the monetary policy meeting in Frankfurt, the central bank said in a statement that its revised guidance “underlines its commitment to maintaining a persistently accommodative monetary policy stance to meet its inflation target”.
Eurozone government bond yields fell just after the announcement. The 10-year yield in Germany was 0.02 percentage points lower to minus 0.41 percent, while the 10-year yield in Italy fell by a similar amount to 0.66 percent. The euro weakened slightly against the US dollar, to $ 1,1777.
Christine Lagarde, president of the ECB, said the outlook for eurozone inflation was “subdued” despite hopes of “strong growth” in the eurozone economy in the third quarter. He added that the spread of the Delta coronavirus variant was “a growing source of uncertainty.”
There was also “some way to go before the fall from the pandemic on inflation is eliminated,” he added, suggesting that the ECB was unlikely to tighten its bond purchases soon.
Lagarde acknowledged that there had been some divisions in the governing council over the orientation but had been backed by “an overwhelming majority” – in contrast to unanimous support for his new strategy.
Elga Bartsch, head of macro research at the BlackRock Investment Institute, said the ECB had given “a dovish surprise” that it was likely to be followed by “upward regulation” of its asset purchase plans later this year.
The ECB has stated that its deposit rate will not increase by less than 0.5 per cent until inflation reaches 2 per cent “well before the end of its projection horizon and sustainably for the rest of the year. ‘projection horizon, and judges that the progress made in underlying inflation is advanced enough to be consistent with inflation stabilizing at 2 per cent over the medium term”.
He added: “This may also imply a transitional period in which inflation is moderately above target.”
The new wording sets a higher bar for rising interest rates than the previous guide.
However, inflation has gone below the ECB’s previous target of “close, but below, 2 per cent” for almost a decade, and most investors remain skeptical about the likelihood that the bank achieved its new goal.
“It was a bit like old wine in a new bottle; communication has changed a bit, but in terms of substance, the ECB remains very correct, putting a stop to all related speculation, ”said Carsten Brzeski, head of macro research at ING.
Some ECB tax regulators have called for a reduction in the pace of bond purchases through the € 1.85 million pandemic emergency purchase program (PEPP) it launched in response to the crisis. Covid-19 last year.
But in its statement on Thursday, the ECB adhered to its guidance that the PEPP will last until the March 2022 low and end only once its policymakers have decided that “the coronavirus crisis phase it’s over ”.
The ECB is largely expected to decide in September whether to change the pace of PEPP purchases; in March it rose to 80 billion euros a month after yields on eurozone sovereign bonds began to rise.
Some of the other major central banks in the world, such as Canada and Australia, have already decided to slow down the pace of their Covid-related stimulus programs. Others like the US Federal Reserve are still in dispute when liquidating.
The ECB said its regular asset purchase program – running at € 20 billion a month – was planned to continue “for the time necessary to reinforce the accommodative impact of our policy rates, and to it ends shortly before it starts raising the ECB’s key interest rates. ”
Eurozone inflation has been rising in recent months; in June consumer prices were 1.9 per cent higher than a year ago. The pace of price growth is expected to accelerate further in the second half of this year as the economic recovery of the bloc accelerates.
But the ECB expects inflation to fall back to 1.5 percent next year, encouraging some tax settlers to argue that they should expand their bond purchase plans.
Gurpreet Gill, Goldman Sachs Asset Management strategist, said: “We expect the ECB to maintain its‘ low status ’status quo for the foreseeable future, with rising rates unlikely to be on the political agenda until the second half of this decade. as soon as possible. “
In a survey of about 250 German financiers and economists earlier this month, the Frankfurt Center for Financial Studies found that eight out of 10 believe it would be “increasingly difficult to move away from the policy of low interest rates. interest of the ECB that governments become increasingly dependent on the acquisition of their bonds ”.
Additional reports from Tommy Stubbington in London