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December 16, 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 recent progress on economic recovery permits a step-by-step reduction in the pace of our asset purchases over the coming 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.
Supported by robust domestic demand and improving labour market. economic activity continues to strengthen in the Euro Area. Gross Domestic Product (GDP) in the Euro Area (seasonally adjusted annualized rate) increased 9.1% in Q3 2021. However, due to the impacts of new restrictions associated with the new pandemic wave, the pace of growth is expected to moderate in the final quarter of the year and likely to extend into the early new year.
Despite some short term headwinds, economic growth is expected to remain strong over the next three years and exceed pre-crisis level in Q1 2011 - one quarter later than expected in the September 2021 projections. Private consumption is expected to be the primary driver of economic growth with a rebound in real disposable income, unwinding of the accumulated savings and a strong labour market all benefiting household consumption. 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 unemployment rate continued to decline in the third quarter of 2021 and is expected to decrease further as the recovery gains pace. A stronger than projected increase in employment combined with the decline in the number of workers in job retention schemes points to the strength of the labour market. The recent increase in job vacancies show that the impacts of labour shortages on production remains a sector specific issue, driven by hiring backlogs in the sectors most affected by the pandemic. The unemployment rate is projected to fall to its pre-pandemic level by the end of 2021 and to reach 6.6% in 2024.
The real GDP is projected to grow 5.1% in 2021, 4.2% in 2022 and 2.9% in 2023. Compared with the Bank's September staff projections, the outlook has improved for 2021 and 2023, but is adjusted downwards for 2022.
Euro area inflation increased 4.9% in November 2021. The increase is mainly due to a rise in fuel, gas and electricity prices - which accounted for more than half of headline inflation in November. With demand outpacing supply in some sectors, prices of durable goods and consumer services have also increased. The base year effects related to the end of the VAT reduction in Germany will also contribute to higher inflation until the end of the year.
With the gradual return of economic activity to full capacity, stabilizing energy prices and normalizing consumption patterns, inflation is expected to decline over the course of 2022. While there is uncertainty as to how long these temporary factors will continue to impact inflation, the Bank staff projects inflation to be 2.6% in 2021, 3.2% in 2022 and 1.8% in 2023 and 2024. Compared with the September 2021 projections, headline inflation has been revised strongly upwards, especially in 2022.
Against this background, the Governing Council reconfirmed its accommodative policy stance. The measures in place include:
- Net asset purchases under the pandemic emergency purchase programme (PEPP) will be at a lower pace than in the previous quarter and will be discontinued at the end of March 2022.
- Extension of the reinvestment of principal payments from maturing securities purchased under the PEPP until at least the end of 2024.
- Net purchases under asset purchase programme (APP) at a monthly pace of €40 billion in the second quarter and €30 billion in the third quarter. From October 2022 onwards, net asset purchases under the APP will be maintained at a monthly pace of €20 billion for as long as necessary. 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 stabilizes at its 2.0% target over the medium term. The next scheduled monetary policy meeting will be on February 3, 2022.
Source: European Central Bank: Monetary Policy Decision, Remarks, Eurosystem staff macroeconomic projection December 2021
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