The Governing Council of the European Central Bank (ECB) on Thursday 22 July clarified its monetary policy stance after unveiling its new strategy, which includes a symmetric inflation target of 2% (see EUROPE 12758/1).
In particular, it revised its forward guidance to underline its commitment to maintaining a permanently accommodative monetary policy stance in order to achieve its inflation objective.
In its press release, the ECB thus expects its key interest rates to remain at their current levels, or at lower levels, until three cumulative conditions are met: – inflation must reach 2% well before the end of its projection horizon (currently 2021-2022-2023); – this trend should be sustainable over the rest of its projection horizon; – progress in core inflation will have to be sufficient to be consistent with a stabilisation of inflation at 2% in the medium term.
This may also imply a transitory period in which inflation is moderately above target, it said.
ECB President Christine Lagarde acknowledged that the future path of interest rates described on Thursday was not unanimously supported by the Governing Council, unlike the adoption of its new strategy and the need to review the forward guidance in the light of this strategy.
“This is what I expected”, she said, however. She pointed to the “overwhelming majority” of national central bankers and the ECB’s Executive Board in favour of the future path of rates and placed more emphasis on “the chain of events”.
On the first condition (inflation at 2% well before the end of the projection horizon), the former IMF Director indicated that the deadline would be midway through the projection horizon, i.e. mid-2022 for the current horizon. On the second condition, she said that projected inflation should not fall below 2% over the second part of the projection horizon, i.e. the period from mid-2022 to 2023 for the current horizon, in order to be sustainable.
The ECB is thus introducing “an element of patience whose objective is to avoid a premature tightening of monetary policy”, commented its President.
The uncertainty created by the Delta variant
On the economic situation in the euro area, the monetary institute reported a strong recovery, especially in the services sector, thanks to vaccination and the gradual lifting of health restrictions.
But the rapid spread of the Delta variant of the virus responsible for Covid-19 is “a growing source of uncertainty”, Ms Lagarde said. And while overall economic activity is expected to return to pre-pandemic levels in the first quarter of 2022, it will take time for the scars of the pandemic to heal, she said, noting that current employment levels are still 3.3 million lower than in 2019.
The ECB is thus of the opinion that the risks to the euro-area economy are broadly balanced.
Considering that financing conditions in the economy have not changed since its last policy meeting (see EUROPE 12738/24), the monetary authority continues to expect that purchases under the Pandemic Emergency Purchase Programme (PEPP) will continue at a significantly higher pace in the current quarter than in the first quarter of 2021.
On Thursday, Ms Lagarde assured that the Governing Council had not discussed a downward revision of the pace of purchases of mainly government securities via the PEPP operation.
Endowed with a package totalling €1,850 billion, the PEPP programme will run at least until the end of March 2022, and in any case until the ECB deems that the coronavirus crisis is over. This analysis will be based on expert commentary and figures on employment, industrial production and trade.
See the monetary policy decisions: https://bit.ly/3y14HhP (Original version in French by Mathieu Bion)