ECB Revamps Guidance in Push to Hit Higher Inflation Goal

ECB Revamps Guidance in Push to Hit Higher Inflation Goal

Policy outlook changed after strategy review ended this month. President Lagarde says the pandemic still casting a shadow

The European Central Bank revised its guidance on when interest rates might rise, saying it will persist with ultra-loose monetary stimulus until it has solid evidence that it can sustainably hit its new inflation goal.

The move allows policy makers to keep rates at a record low for longer and extend bond buying. They also said they won’t necessarily react immediateley if inflation overshoots their target for a period. The new language follows an 18-month strategy review by the ECB, which saw it raise its inflation goal to 2% from just-under 2%.

The key change to the guidance means that even if inflation is at the target at the end of the ECB’s three-year forecast horizon, officials won’t necessarily have to respond with tighter policy. The ECB currently foresees price growth averaging just 1.4% in 2023, which suggests any rate hike is years away.

Speaking after the decision, President Christine Lagarde said while backing for the change in guidance wasn’t unanimous among policy makers, there was an “overwhelming majority” behind it.

The ECB’s promise of continued ultra-loose policy sets it apart from some of the world’s biggest central banks. In the U.S., where inflation is running above 5%, Federal Reserve officials are already discussing when to start tapering their stimulus. Some policy makers at the Bank of England have said a reduction in bond buying should be considered soon.

Current tools were kept unchanged:

The deposit rate stayed at -0.5%
The 1.85 trillion-euro ($2.2 trillion) pandemic bond-buying program will continue at an elevated pace, with a scheduled end date of March 2022
The older Asset Purchase Program stays at 20 billion euros a month and will only end shortly before rates start rising
The ECB will keep providing long-term loans to banks
The new guidance states:

“The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term. This may also imply a transitory period in which inflation is moderately above target.”

The euro briefly rose on the announcement, and was little changed at $1.1791 at at 2:40 p.m. Frankfurt time.

On the economic backdrop, Lagarde said the Covid-19 pandemic “continues to cast a shadow” and there is a long way to go on the road to recovery.

“Inflation has picked up thought this increase is expected to be mostly transitory,” she said. “We need to preserve favorable financing conditions” because “this is essential for the current rebouind to turn into a lasting expansion.”

What Bloomberg’s Economists Say...
“The new forward guidance reflects the commitment in the strategy review to more vigorous action... We think the next step will be an increase in asset purchases at the September meeting.”

--David Powell and Maeva Cousin. Read the full REACT

The strategy review, the first in 18 years, addressed the ECB’s decade-long struggle to stoke price growth in the euro area, as well as topics such as climate change, inequality and digitization. It concluded that when interest rates are almost as low as they can effectively go -- as now -- policy needs to be “especially forceful or persistent.”

Still, the review comes just as the currency bloc and much of the rest of the world are hit by accelerating inflation, driven by booming demand and constrained supply as coronavirus restrictions are withdrawn. While the ECB predicts euro-area price growth will fall back below target next year as the economy rebalances, some policy makers have signaled concern that inflation expectations may become entrenched at too high a level.

The Governing Council will face some key decisions after the summer, when it’ll have to start considering how and when to wind down the pandemic purchase program and what should replace it. Economists expect buying to slow in the fourth quarter.

That debate could be complicated by the spread of the delta variant of the coronavirus. Cases are on the rise in countries including the Netherlands and Spain, raising the risk of new travel curbs that would hit the bloc’s tourism-dependent south hardest. es un sitio web oficial del Gobierno Argentino