Politics

ECB pledges to continue with negative interest rates to fuel inflation

The European Central Bank will continue to buy bonds and maintain very negative interest rates in an attempt to pull the euro-zone economy out of its ongoing pattern of sluggish inflation, its policymakers decided on Thursday.

The ECB also said for the first time that it was prepared to tolerate a moderate and temporary overshoot of its inflation target, which could result from the “sustained” policy it deems necessary when interest rates are close to the lowest point at which the cuts take effect. are – as they are now.

The new directive came two weeks after the ECB agreed a new strategy that raised its inflation target to 2 percent, made a pledge to keep price increases below that level, and accepted that they could even exceed it temporarily. It was the first change in strategy in nearly two decades.

After the monetary policy meeting in Frankfurt, the central bank said in a statement that its revised guidance “would underline its determination to maintain a continued accommodative monetary policy stance to meet its inflation target”.

It said its deposit rate would not rise from minus 0.5 percent until inflation reaches 2 percent “well before the end of the projection horizon and sustainable for the remainder of the projection horizon, and it believes that the progress achieved in underlying inflation is sufficient. have progressed to be consistent with inflation stabilizing at 2 percent over the medium term.”

It added: “This may also imply a transition period where inflation is moderately above target.”

The new wording sets a higher bar for rate hikes than the previous guideline that inflation should “converge robustly” with its target and this convergence should be “consistently reflected in underlying inflation dynamics”.

However, as inflation has been below the ECB’s previous target of “close to, but below 2 percent” for nearly a decade, most investors have stay skeptical on the likelihood that the bank will achieve its new target.

Some ECB rate setters have called for a slowdown in the pace of bond purchases through the €1.85 trillion Pandemic Emergency Purchase Program (PEPP) launched last year in response to the Covid-19 crisis.

But in its statement on Thursday, the ECB stuck to its guideline that the PEPP will last at least until March 2022 and will not end until policymakers decide that “the phase of the coronavirus crisis is over”.

It is generally expected that the ECB will decide in September whether to change the pace of PEPP purchases; in March, it increased it to €80 billion a month after eurozone government bond yields started rising.

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 programs. Others, like the US Federal Reserve, are still debating when to phase it out.

On Thursday, the ECB reiterated its previous advice that its decision on PEPP would be based on “avoiding a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the expected inflation path”.

It also said its regular asset purchase program – worth €20 billion per month – is expected to continue “for as long as necessary to amplify the accommodating impact of our policy rates, and to end shortly before we begin.” raising the key ECB interest rates. ”.

Eurozone inflation has risen in recent months; in June consumer prices were 1.9 percent 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 gains momentum.

But the ECB expects inflation to decline to 1.5 percent next year, prompting some rate setters to call for an extension of its bond-buying plans.

In a survey of around 250 German financiers and economists earlier this month, the Center for Financial Studies in Frankfurt found that eight out of ten believed it would become “increasingly difficult to deviate from the ECB’s low-interest policy policy as governments become increasingly dependent become of purchases”. of their bonds”.

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