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October 28, 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. The Bank noted that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the pandemic emergency purchase programme (PEPP) than in the previous two quarters.
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.
While momentum slowed to some extent, economic activity continued its strong growth in the third quarter. As restrictions continue to be lifted, consumer spending, especially services consumption is increasing. However, higher energy prices might put some downward pressure on consumer spending over the short-term.
Production is being supported by recovery in domestic and local markets. Shortages of materials, equipment and labour are limiting the pick up in manufacturing sector. With higher transportation and energy costs and increased delivery times, outlook for manufacturing sector is constrained in the coming quarters.
The labour market continues to improve with lower unemployment levels and the number of people in job retention schemes. While the number of people in labour force and the hours worked are still below their pre-pandemic levels, continued improvement in the labour market is expected to result in higher incomes and consumer spending.
The ECB continues to project that output to exceed its pre-pandemic level by the end of 2021. The spike in annual inflation reflects mainly temporary factors such as rebound in energy prices, the reversal of the temporary VAT reduction in Germany, and higher prices due to demand outpacing supply. Higher prices are especially visible in consumer services where the prices of goods were most strongly impacted by supply shortages.
The ECB expects the impacts of these temporary factors to ease over the course of 2022 or to fall out of the year-over-year inflation calculation. While the current phase of higher inflation is expected to last longer than initially projected, the ECB expects inflation to decline in the course of next year.
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. Given the inflation outlook and financing conditions, the Governing Council judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the PEPP than in the previous two quarters.
- 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 December 16, 2021.
Source: European Central Bank: Monetary Policy Decision, Remarks
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