The ECB confirms the key interest rates, its own monetary policy tools Pepper in particular, and changes its forward guidance, in line with what was decided on July 8, the day on which it announced its new monetary policy strategy, revising upwards the inflation target at 2% symmetrical.
The new forward guidance on rates confirms the commitment of the central bank led by Christine Lagarde to remain dovish “in a persistent way”.
The press release shows that the central institution, as expected, left the interest rates on the main refinancing operations, on the marginal lending facility and on the deposits with the central bank unchanged respectively at 0.00%, 0.25% and -0.50%.
The new forward guidance is as follows:
“The Governing Council expects the main interest rates will remain at current levels or below until inflation reaches 2% well before the end of its projection horizon and sustainably for the remainder of the projection horizon, and believes that the progress made in underlying inflation is sufficiently advanced to be consistent with inflation stabilizing at 2% over the medium term. This may also imply a transitional period in which inflation is moderately above target ”.
Lagarde, she said herself in the press conference following the announcement on rates and the publication of the press release, in short, wants inflation to hit the 2% target in a lasting way.
For now, the target has also been breached, in reality, but the ECB number one has repeated what was previously said, namely that the flare-up in prices that the euro area has witnessed is explained by the base effect and the jump in energy prices.
In the medium term, the situation will be different, given that inflation is expected to fail to hit the target yet. It is for this reason that the ECB, the president insisted, will have to act in a determined and persistent way.
On what the symmetrical target is, an explanation was already given on the day of the announcement:
“By target 2% symmetrical we mean they are equally undesirable upward and downward deviations – said Lagarde, underlining that “2% is not a ceiling”.
On that occasion it was also specified that the ECB did not have no intention to swindle the Fed with the adoption of AIT, or average inflation targeting (AIT), a policy that had ushered in a new era for the Federal Reserve, announced last year in Jackson Hole. It is a policy that allows central banks that use it to use the average of recent inflation rate values as a basis for future monetary policy choices.
On the health conditions of the Eurozone economy, Christine Lagarde stressed that she foresees for the third quarter solid GDP growth.
However, he could not miss it a beware of the Delta variant, which could weigh on the trend of the services and tourism sectors and which represents a growing source of uncertainty.
Simply put, Lagarde confirmed the sad truth of the pandemic New Normal: the economy depends on both the trend of the Covid-19 pandemic and the pace of vaccinations.
Those hoping for news from the PEPP, or the pandemic asset purchase program, were disappointed:
“We didn’t discuss Pepp“, The economist cut short, reassuring however that the purchases will go on at least until March 2022 and in any case until the ECB has deemed the Covid-19 pandemic over.
Some analysts had speculated that, in today’s meeting – which, as the central bank number one pointed out, was the first in which the new monetary policy strategy became operational – Lagarde might have shown that the Eurotower arsenal did not was still completely emptied. Maybe, saying that the PEPP would have to expire could have changed skin. A hypothesis that cannot be ruled out yet, given that there is still time.
“The PEPP, which began in March 2020 in full pandemic emergency, allows the ECB to buy on the market with flexibility and discretion. After March 2022, the ECB will likely seek to transfer some of the flexibility of the PEPP to APP, the main purchasing program. The ECB may (in July or at subsequent meetings) start talking about this as one of the new tools to bring inflation expectations to 2%. For example, the PEPP (Pandemic Emergency Purchase Program, precisely pandemic QE) could become a ‘PRPP’ (Pandemic Recovery Purchase Programme), and therefore become a tool to compress spreads well beyond 2022. This would be seen as very dovish by the market ”, had written in the preview on what the ECB Pasquale Diana, Senior Macro Economist of AcomeA SGR, would have done and said today.
Xian Chan, head of the investment division for the wealth management division at HSBC, noted the tone of the ECB in any case it has become “more powerful”.
“This is an important step forward that the ECB needed to take, as the markets, waiting for the meeting, were not convinced of the institution’s ability to stimulate activity and inflation”.
“We want 2% inflation to last,” Lagarde said at a press conference. Of course, the ECB’s own projections are not promising, given that the outlook is for inflation of 1.9% at the end of 2021, followed by a slowdown to 1.5% in 2022 and 1.4 % in 2023.
That said, Lagarde wanted to make a clarification, almost as if to apologize for an increasingly dovish monetary policy:
“Our monetary policy does not aim to keep interest rates low for the longest possible period of time, but rather aims to hit the 2% inflation target.” “We have to act in a powerful and persistent way,” he insisted. And the will, in grabbing that inflation target that now seems to be a Mission Impossible, is certainly not lacking.