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December 10, 2020EUROPEAN CENTRAL BANK MONETARY POLICY The European Central Bank announced today that key interest rates would remain unchanged at their current levels given the need to continue monetary policy stimulus to support economic recovery and price stability. They are expected to remain at their present or lower levels until the inflation outlook converges to a level sufficiently close to, but below the target rate of 2 per cent consistently.
Economic activity in the Euro Area increased 12.5% from the previous quarter in Q3 following a sharp contraction in the first half of 2020. Despite the rebound in economic conditions, activity in the third quarter remains below pre-pandemic levels. Further, the pace of economic recovery is expected to significantly slow in the fourth quarter due to second round of containment measures being introduced to limit the second wave of the pandemic.
Recovery continues to be uneven across sectors with industries relying on face-to-face interactions falling behind in recovery. While fiscal stimulus measures are providing support to businesses and households, confidence remains low.
Against an uncertain background, the Governing Council recalibrated its monetary policy instruments in light of the economic slowdown due to increased number of cases. The new changes include:
- Increasing the envelope of the pandemic emergency purchase programme (PEPP) by €500 billion to a total of £1,850 billion and extending the horizon for net purchases under PEPP to at least the end of March 2022. The net purchases will continue until the COVID-19 crisis is over.
- Extension of the reinvestment of principal payments from maturing securities purchased under the PEPP until at least the end of 2023.
- Further recalibrating the conditions of the third series of targeted longer-term refinancing operations (TLTRO III) including extending the period to June 2022 and increasing the amount parties can borrow from 50% to 55% of their stock eligible loans. These conditions will be offered only to banks that achieve a new lending performance target in order to sustain the current level of bank lending.
- Four additional pandemic emergency longer-term refinancing operations (PELTROs) in 2021. This is expected to provide an effective liquidity backstop.
- Continuation of the net purchases under the asset purchase programme (APP) at a monthly pace of €20 billion. The Governing Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.
- Extension of the Eurosystem repo facility for central banks (EUREP) and all temporary swap and repo lines with non-euro area central banks until March 2022.
While the prospects of an effective vaccine roll-out provides more confidence that the health crisis will gradually resolve, the recovery of economic activity in the Euro Area needs to be supported by favourable financing conditions over the short term.
The December 2020 Eurosystem staff macroeconomic projection’s baseline scenario forecasts real Gross Domestic Product (GDP) to decline by 7.9% in 2020 followed by a 3.9% growth in 2021. Economic growth is projected to rebound to 4.2% in 2022 and than slow down to 2.1% in 2023. The December 2020 projections over the short term represent a small downgrade from the September 2020 ECB staff macroeconomic projections.
The Eurostat flash estimates show that annual inflation in the Euro Area remained unchanged at -0.3% in November 2020. Given the soft energy prices and the temporary reduction in the German VAT rate, inflation is expected to remain negative until early 2021. With the end of the temporary reduction in the German VAT rate and upward trajectory for energy prices, inflation is expected increase over the medium term. A recovery in demand supported by fiscal stimulus is also expected to put upward pressure on inflation. The December 2020 ECB staff projections see annual inflation at 0.2% in 2020 before increasing to 1.0% in 2021. Inflation is expected to gradually increase to 1.1% in 2022 and 1.4% in 2023. However, the December projections for inflation in 2020 and 2022 represent a downgrade from the September 2020 projections.
Overall, the Governing Council noted that an ample degree of monetary accommodations is necessary to support economic activity and the robust convergence of inflation to levels that are below, but close to, 2 per cent over the medium. In addition, an ambitious and coordinated fiscal stance remains critical, in view of the sharp contraction in the euro area economy and the reduction in private demand.
The Governing Council noted that the monetary policy measures announced today are expected to sustain favourable financing conditions over the pandemic period and support the flow of credit to all sectors of the economy.
The Governing Council also noted that the Next Generation EU package has an important role in supporting a faster, stronger, and more uniform recovery among Member States. The Governing Council reconfirmed their stand to adjust the monetary policy instruments as needed to ensure that inflation moves toward the target rate in a sustained manner.
Source: European Central Bank: Monetary Policy Decision, Remarks
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