The European Central Bank maintained its extensive stimulus for the euro zone on Thursday, signaling that continued support is needed to meet its newly revised, higher inflation target.
The 25-member Governing Council decided at its meeting to keep interest rates at historic lows, including a negative bank deposit rate, the ECB said in a statement.
The governors also made no changes to their $ 1.85 trillion ($ 2.2 trillion) pandemic emergency bond purchase program (PEPP), which is the bank’s primary tool to help the region through the pandemic crisis.
The ECB’s ultra-loose monetary policies aim to keep lending cheap in the eurozone in order to stimulate lending and investment.
Thursday’s meeting was the first since the ECB presented the results of an 18-month strategic review of the bank’s tools and objectives – the first since 2003.
The biggest change was a revised inflation target of two percent, compared to an earlier “near but below two percent” target that had been out of reach for years.
The new target was reflected in the “Forward Guidance” statement issued by the ECB on Thursday, which describes the latest monetary policy decisions in detail and is being scrutinized by the markets for indications of future interest rate hikes and bond purchases.
The revised statement promised to keep interest rates at their current low levels until inflation “permanently” hits the new two percent target.
ECB President Christine Lagarde had promised earlier this month to revise the declaration in clearer language.
Attention is now shifting to Lagarde’s press conference at 1230 GMT in Frankfurt, where she will likely be asked when the bank might start processing the PEPP purchases.
Although some disagreement has arisen among ECB governors over when to wean the 19-nation currency club off the massive incentives, observers say a recent surge in coronavirus cases is likely to delay the discussion about tightening policy.
The story goes on
In the “Forward Guidance” declaration it was confirmed that PEPP will remain in force until at least March 2022 or until the ECB “considers the coronavirus crisis phase to be over”.
A solid recovery is underway across the euro area thanks to mass vaccinations and widespread reopenings.
However, concerns about the rapid spread of the Delta variant of the virus are growing, leading to a surge in new cases and forcing several countries to reintroduce restrictions.
Chancellor Angela Merkel on Thursday expressed concern about “exponential growth” in Covid-19 infections after a period of relatively low numbers that has allowed the country to ease restrictions on hotels, restaurants, shops, pools and other businesses .
– Rising prices –
Lagarde can also expect to be asked about the bank’s new inflation target, which it has termed a “simpler” and “more symmetrical” target, meaning the bank will temporarily break above or below inflation before intervening.
Inflation in the eurozone has been persistently low for years, despite exceptional economic stimulus efforts by the ECB.
But global consumer prices have risen in recent months, driven by one-off factors related to the pandemic such as demand for the lockdown and supply chain bottlenecks.
Investors are on high alert over the price hikes as they fear they could force policymakers to hike rates, hindering post-Covid recovery.
Lagarde is likely to reiterate that the ECB plans to “see through” what is likely to be a temporary rise in inflation and reiterate that interest rates will remain lower for longer.
This would put the ECB on a different path than the United States, where the Federal Reserve is getting closer to a rate hike.
The ECB expects inflation in the euro area to hit 1.9 percent this year before dropping back to 1.4 percent in 2023 – far from the bank’s target.
Many analysts say the ECB is unlikely to make any policy changes until its next meeting in September, when it releases new inflation and growth estimates that will paint a clearer picture of the delta’s impact on economic activity.
mfp / dlc / wai
