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July 22, 2021EUROPEAN CENTRAL BANK MONETARY POLICY The European Central Bank announced that key interest rates would remain unchanged at their current levels. The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively.
As the policy rates have been close to their lower bound for some time and the medium-term inflation outlook is still below the target levels, the ECB revised its forward guidance on interest rates. In support of the new symmetric 2.0% inflation target and in line with the monetary policy strategy, the key interest rates are expected to remain at their present or lower levels until inflation reaches 2.0% well ahead of the end of the projection horizon and durably for the rest of the projection horizon. The ECB noted that current inflation levels are consistent with inflation stabilising at 2.0% over medium term, and there could be a transitory period where inflation exceeds the target for some time.
Following a 0.3% contraction in the first quarter of the year, the euro area economy rebounded in the second quarter as more people are vaccinated and restrictions are eased. The economy is on track for strong growth in the third quarter supported by consumer spending and manufacturing production.
With restrictions easing, consumer spending is increasing which is driving a recovery in the services sectors. Increased confidence and employment combined with continued government support are further supporting consumer spending.
The ECB expects economic activity to return to pre-pandemic level in Q1 2022. Over the medium term, the Bank expects robust global and domestic demand along with accommodative monetary and fiscal policy measures to support economic growth in the euro area. The real GDP is projected to grow 4.6% in 2021, 4.7% in 2022 and 2.1% in 2023.
Euro area inflation moved from 2.0% in May 2021 to 1.9% in June reflecting the base effects, month-over-month increases in energy prices, and the impact of the temporary VAT reduction in Germany last year. The impacts of these transitionary factors are expected to fade out by early 2022.
Temporary supply constraints and recovery in domestic demand could put an upward pressure on prices. However, low wage pressures and the appreciation of the euro exchange rate are expected to keep this pressure subdued. Post-pandemic, the unwinding of elevated slack and supportive fiscal and monetary policies will contribute to gradual increase in inflation over medium term.
While the long-term inflation projections have increased, they are still below the 2.0% target. The ECB staff projections are for annual inflation of 1.9% in 2021, 1.5% in 2022, and 1.4% in 2023.
Against this background, the Governing Council reconfirmed its accommodative policy stance. The measures in place include:
- Continuation of net asset purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,850 billion until at least the end of March 2022. The net purchases will continue until the COVID-19 crisis is over.
- Continuation of the reinvestment of principal payments from maturing securities purchased under the PEPP until at least the end of 2023.
- Continuation of net purchases under asset purchase programme (APP) at a monthly pace of €20 billion. Monthly net asset purchases are expected to run for as long as necessary to reinforce the accommodative impact of the policy rates, and shortly before any increase in the key ECB interest rates.
- Continuation of the third series of targeted longer-term refinancing operations (TLTRO III). 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.
The Governing Council reconfirmed their stance to adjust the monetary policy instruments as needed to ensure that inflation moves toward the target rate in a sustained manner. The next scheduled monetary policy meeting of the Governing Council is on September 9, 2021.
Source: European Central Bank: Monetary Policy Decision, Remarks
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