The European Central Bank will continue to buy bonds and maintain very negative interest rates in an attempt to pull the euro-zone economy out of its ongoing pattern of sluggish inflation, its policymakers decided on Thursday.
The ECB also said it was willing to tolerate a moderate and temporary overshooting of its inflation target, as it believes “sustained” policy is necessary when interest rates are close to the lowest point at which the cuts are effective – as is the case now. is.
The guidance came two weeks after the ECB agreed on a new strategy that raised its inflation target to 2 percent, dropped a pledge to keep price increases below that level and accepted that they could even exceed it temporarily. It was the first change in strategy in nearly two decades.
After the monetary policy meeting in Frankfurt, the central bank said in a statement that its revised guidance “would underline its determination to maintain a continued accommodative monetary policy stance to meet its inflation target”.
Eurozone government bond yields fell slightly after the announcement. Germany’s 10-year yield was 0.02 percentage point lower at minus 0.41 percent, while Italy’s 10-year yield fell by a similar amount to 0.66 percent. Against the US dollar, the euro weakened slightly to $1.1777.
Christine Lagarde, president of the ECB, said the outlook for inflation in the eurozone was “moderate” despite expectations for “strong growth” of the eurozone economy in the third quarter. She added that the spread of the Delta coronavirus variant has been “a growing source of uncertainty.”
There was still “a way to go before the impact of the pandemic on inflation is eliminated,” she added, suggesting the ECB is unlikely to phase out its bond purchases any time soon.
Lagarde acknowledged that there was some division in the board over the guidance, but it was supported by “an overwhelming majority” – as opposed to unanimous support for his new strategy.
Elga Bartsch, head of macro research at the BlackRock Investment Institute, said the ECB had brought “a mild surprise” that was likely to be followed later this year by “an upward revision” to its asset purchase plans.
The ECB said its deposit rate would not rise from minus 0.5 percent until inflation reaches 2 percent “well before the end of the projection horizon and sustainable for the rest of the projection horizon, and it believes that the progress achieved in the underlying inflation has progressed sufficiently to be consistent with a stabilization of inflation at 2 percent over the medium term”.
It added: “This may also imply a transition period where inflation is moderately above target.”
The new wording sets a higher bar for interest rate hikes than previous guidelines.
However, inflation has been below the ECB’s previous target of “close to but below 2 percent” for nearly a decade, and most investors remain skeptical about the bank’s likelihood of reaching its new target.
“This was a bit like old wine in a new bottle; the communication has changed somewhat, but the ECB remains very skeptical about the substance, which puts a limit on any diminishing speculation,” said Carsten Brzeski, head of macro research at ING.
Some ECB rate setters have called for a slowdown in the pace of bond purchases through the €1.85 trillion pandemic emergency purchase program (PEPP) launched last year in response to the Covid-19 crisis.
But in its statement on Thursday, the ECB stuck to its guideline that the PEPP will last at least until March 2022 and will not end until its policymakers decide that “the phase of the coronavirus crisis is over”.
It is generally expected that the ECB will decide in September whether to change the pace of PEPP purchases; in March, it raised them to €80 billion a month after eurozone government bond yields started rising.
Some of the world’s other major central banks, such as Canada and Australia, have already decided to slow the pace of their Covid-related stimulus programs. Others, like the US Federal Reserve, are still debating when to phase it out.
The ECB said its regular asset purchase program – worth €20 billion per month – is expected to continue “for as long as necessary to amplify the accommodative impact of our policy rates, and to end shortly before we start.” with raising the key ECB interest rates”.
Eurozone inflation has risen in recent months; in June, consumer prices were 1.9 percent higher than a year ago. The pace of price growth is expected to accelerate further in the second half of this year as the bloc’s economic recovery gains momentum.
But the ECB expects inflation to decline to 1.5 percent next year, prompting some interest rate setters to argue in favor of expanding its bond-buying plans.
Gurpreet Gill, a strategist at Goldman Sachs Asset Management, said: “We expect the ECB to maintain its ‘status low’ status for the foreseeable future, with rate hikes likely not on the policy agenda until the second half of this decade. standing. at the earliest.”
In a survey of about 250 German financiers and economists earlier this month, the Center for Financial Studies in Frankfurt found that eight out of ten believed it would “become increasingly difficult to deviate from the ECB’s low interest rate policy as governments become increasingly dependent of purchases”. of their bonds”.
Additional coverage from Tommy Stubbington in London