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October 29, 2020

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.

Following a 11.8 per cent decline in the second quarter of 2020, the Euro area economic activity rebounded strongly in the third quarter and recovered almost half of the contraction in the first half of 2020. However, incoming data point to a significant softening in economic activity in the fourth quarter as the resurgence in coronavirus infections presents new challenges to public health. While the uncertainty related to the evolution of the pandemic will likely dampen the strength of the recovery in the labour market and in consumption and investment, the euro area economy is expected to be supported by favourable financing conditions and an expansionary fiscal stance.

Euro area annual inflation decreased to -0.3 per cent in September, from -0.2 per cent observed in August, reflecting declines in prices of energy, non-energy industrial goods and services. Near-term price pressures are expected to remain subdued owing to weak demand, notably in the tourism and travel-related sectors, as well as to lower wage pressures and the appreciation of the euro exchange rate.

Against a very uncertain outlook, the Governing Council reconfirmed their accommodative monetary policy. The monetary policy elements include:

  • Continuation of purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,350 billion. These purchases contribute to easing the overall monetary policy stance, thereby helping to offset the pandemic-related downward shift in the projected path of inflation.
  • Continuation of net purchases under the asset purchase programme (APP) at a monthly pace of €20 billion, together with the purchases under the additional €120 billion temporary envelope until the end of the year. 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.
  • Continuation of refinancing operations, particularly the latest operation in the third series of targeted longer-term refinancing operations (TLTRO III).

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 also noted that the Next Generation EU package will be very important to support a faster, stronger, and more uniform recovery among Member States. The Governing Council is expected to recalibrate its instruments, as appropriate, to respond to the unfolding situation and to ensure that financing conditions remain favourable to support the economic recovery and counteract the negative impact of the pandemic on the projected inflation path based on the updated macroeconomic projections which will be released in December. 

Source: European Central Bank: Monetary Policy Decision, Remarks