The European Central Bank will keep buying bonds and maintain its deeply negative interest rates in an attempt to shift the eurozone economy out of its persistent pattern of sluggish inflation, its policymakers decided on Thursday.
The ECB also said it was prepared to tolerate a moderate and transitory overshoot of its inflation target as it believes that a “persistent” policy is necessary when rates are close to the lowest point at which cuts are effective — as they are now.
The guidance came two weeks after the ECB agreed a new strategy that lifted its inflation target to 2 per cent, dropped a promise to keep price rises below that level and accepted that they can even exceed it temporarily. It was the first change in strategy for almost two decades.
After the monetary policy meeting in Frankfurt, the central bank said in a statement that its revised guidance would “underline its commitment to maintain a persistently accommodative monetary policy stance to meet its inflation target”.
Eurozone government bond yields fell slightly following the announcement. Germany’s 10-year yield was 0.02 percentage points lower at minus 0.41 per cent, while Italy’s 10-year yield fell by a similar amount to 0.66 per cent. The euro weakened slightly against the US dollar, to $1.1777.
Christine Lagarde, ECB president, said the outlook for eurozone inflation was “subdued” despite expectations for “strong growth” in the eurozone economy in the third quarter. She added that the spread of the Delta coronavirus variant was “a growing source of uncertainty”.
There was still “some way to go before the fallout from the pandemic on inflation is eliminated”, she added, suggesting the ECB was unlikely to taper its bond buying soon.
Lagarde acknowledged there had been some divisions in the governing council over the guidance but it had been supported by “an overwhelming majority” — in contrast to the unanimous support for its new strategy.
Elga Bartsch, head of macro research at the BlackRock Investment Institute, said the ECB had delivered “a dovish surprise” that was likely to be followed by “an upward adjustment” of its asset purchase plans later this year.
The ECB said its deposit rate would not rise from minus 0.5 per cent until inflation hits 2 per cent “well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2 per cent over the medium term”.
It added: “This may also imply a transitory period in which inflation is moderately above target.”
The new wording sets a higher bar for interest rate rises than previous guidance did.
However, inflation has run below the ECB’s earlier target of “close to, but below, 2 per cent” for almost a decade, and most investors remain sceptical about the likelihood that the bank will meet its new goal.
“This was a bit like old wine in a new bottle; the communication has changed somewhat but in terms of substance the ECB remains very dovish, putting a cap on any tapering speculations,” said Carsten Brzeski, head of macro research at ING.
Some ECB rate-setters have called for a reduction in the pace of bond purchases through the €1.85tn pandemic emergency purchase programme (PEPP) that it launched in response to the Covid-19 crisis last year.
But in its statement on Thursday the ECB stuck to its guidance that the PEPP will last until at least March 2022 and only end once its policymakers decide that “the coronavirus crisis phase is over”.
The ECB is widely expected to decide in September whether to change the pace of PEPP purchases; in March it increased them to €80bn a month after eurozone sovereign bond yields began to rise.
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 programmes. Others such as the US Federal Reserve are still debating when to wind it down.
The ECB said its regular asset purchase programme — running at €20bn a month — was expected to continue “for as long as necessary to reinforce the accommodative impact of our policy rates, and to end shortly before we start raising the key ECB 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 bloc’s economic recovery gathers pace.
But the ECB expects inflation to fade back to 1.5 per cent next year, prompting some rate-setters to argue it should expand its bond-buying plans.
Gurpreet Gill, a strategist at Goldman Sachs Asset Management, said: “We expect the ECB to maintain its status quo of ‘status low’ for the foreseeable future, with rate hikes unlikely to be on the policy agenda until the second half of this decade 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 10 believed it would be “increasingly difficult to depart from the ECB’s low interest rate policy as governments become increasingly dependent on purchases of their bonds”.
Additional reporting by Tommy Stubbington in London