The European Central Bank held its monetary policy stable on Thursday but adjusted its forecast to reflect its recently raised inflation target.
The ECB has committed to buying 1.85 trillion euros (2.2 trillion US dollars) of bonds by March 2022 as part of its pandemic emergency purchase program, and policy makers have decided to keep that incentive on the table for now left.
Interest rates were also left unchanged, with the main deposit facility rate remaining at -0.5%, the reference lending rate at 0% and the marginal lending facility at 0.25%.
However, the Governing Council of the Eurozone Central Bank revised its interest rate forward guidance after raising its medium-term inflation target to a symmetrical 2% in its most recent strategy review.
The ECB said in a statement that it expects interest rates to “remain at their current or lower levels until inflation hits two percent well before the end of its projection horizon and persistently for the remainder of the projection horizon, and it judges” that they do Advances in underlying inflation are so advanced that inflation will stabilize at two percent over the medium term. “
“This can also mean a transition period when inflation is moderately above target,” she added.
The reluctant bias effectively ties inflation closer to interest rates and has been seen as a promise to be more accommodative over a longer period of time.
The euro quickly rose to 1.1804 against the dollar on the news, but then lost those gains to hit the daily lows of 1.1777.
With interest rates near their floor for some time and inflation staying below the Governing Council’s target, the ECB also pledged to maintain “a sustained accommodative policy stance” in order to meet its inflation target.
The latest ECB forecasts project headline inflation to reach 1.9% by the end of 2021, followed by a decline to 1.5% and 1.4% in 2022 and 2023, respectively.
European stocks changed little in the immediate aftermath of the announcement, with the pan-European Stoxx 600 holding most of the morning’s gains.
Bond yields fell sharply, with the benchmark yield on 10-year German Bunds falling to -0.41% and that of 30-year Bunds falling to 0.074%.
A more “energetic” tone
Xian Chan, HSBC’s chief investment officer, wealth management, noted that the ECB’s tone had become “more forceful”.
“This is an important development that the ECB had to make because the markets that went into the session were not convinced that they could successfully stimulate activity and inflation,” he said.
“The market (according to the 5Y5Y inflation swap) was assuming inflation of only 1.6%, which is well below the target of 2%.”
In its June press release, the ECB said it expected inflation to remain at an anemic 1.4% in 2023.
“So the bank really needed to show how to ‘be more forceful or tenacious’ about forward guidance and it did not disappoint,” said Chan.
He suggested that the central bank’s tone would be helpful for European stocks and recovery trading in the short term, while the hint that rates could stay low for longer could point to lower trading for the euro.
“We are keeping an eye on whether market-implied inflation starts to rise as it will show how confident the markets are that the new forward guidance will be effective,” said Chan.
Neil Birrell, Chief Investment Officer of Premier Miton, said Thursday’s statement made it clear that the ECB would “run hot” on inflation and growth rather than risking the bloc’s economic recovery, and its position in the camp, “We will.” what is necessary ”maintains.
“Still a long way to go”
In a press conference following the decision, ECB President Christine Lagarde said: “There is still a long way to go before the damage to the economy caused by the pandemic is offset.”
Inflation stood at 1.9% in June and the ECB expects consumer prices to continue to rise in the coming months before falling again in 2022.
“The current rise in inflation is largely driven by higher energy prices and base effects from the sharp drop in oil prices at the beginning of the pandemic and the effects of the temporary VAT cut in Germany last year,” said Lagarde.
“In the course of the economic recovery, supported by our monetary policy measures, we expect inflation to rise in the medium term, even if it will remain below our target. While the measures for the longer-term inflation expectations have increased, they remain somewhat of our 2% – Target removed. “
