MILANO – The European Central Bank has adapted its way of giving indications to the market on its monetary policy decisions to the recent strategic review, while confirming the paraphernalia of policies adopted to respond to the crisis.
As the Intesa Sanpaolo analysts summarized before the meeting, it was expected that the forward-looking indications (the so-called forward guidance) were modified to reflect the change in the Eurotower strategic objective on price stability: now the inflation target is set simply at 2% from the previous level “sufficiently close but below 2%”. And so it was.
In the statement after the meeting, the ECB premises to revise its indications to “underline its commitment to maintain a constantly accommodative monetary policy stance to achieve its inflation target”, given that the price outlook is still well below the level desired. The options on the table were for “minimal” intervention with the simple replacement of the old lens with the new one. But it was not excluded that the Eurotower could decide to take the opportunity to condition inflation expectations and accelerate their convergence to 2%, inserting an explicit reference to the possibility of a transitional period of inflation moderately above 2%.
This second hypothesis occurred. Indeed, the Council expects rates to remain at or below these levels until it reaches the inflation target well before the end of the forecast horizon and on a lasting basis for the remainder of the forecast horizon, and judges that the progress made by underlying inflation is sufficient to stabilize inflation at 2% over the medium term. This, it is made explicit in the press release, may imply transitional periods in which inflation is moderately above the target. Like the Fed, therefore, the tolerance of slightly higher prices is made clear, especially in a phase like this of the exit from the crisis, in order not to frustrate the recovery.
Another special aspect observed were the conditions for the termination of the net purchases of the main securities purchase program (App) and for the rate hike, which were previously linked: it was indicated that the purchases would end shortly before the rate hike. . This forecast is also confirmed in the new version of the press release: purchases will proceed at the rate of 20 billion per month and will last as long as necessary to strengthen the expansionary impact of the low interest rate policy, and will end just before rates are raised. Reinvestment of maturing securities confirmed, even after rising rates.
On Pepp, the anti-pandemic purchasing program which is set to last until March 2022, there was unanimous expectation for a postponement of discussions to September. The press release confirms the total size of 1,850 billion and the horizon to March 2022 or when the coronavirus crisis will be over. The accelerated pace of purchases in the current quarter has also been confirmed.
“The recovery of the economy is underway,” explained the president Christine Lagarde during the press conference, recalling that on the other hand the pandemic continues to cast shadows on the future with the Delta variant that worries. In the Council, Lagarde reconstructed, “there was no unanimity but an overwhelming majority” on the revision of the forward guidance on interest rates provided today, while it was unanimously agreed to proceed with the revision to make it more consistent with the new strategy. As for the end of the Pepp purchases, there has been no mention of it: the ECB will be “patient”, “none of us want a premature tightening” of monetary policy.