Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

ECB pledges low rates for longer as virus casts shadow over growth

EconomyJul 22, 2021 12:32PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. FILE PHOTO: The European Central Bank (ECB) logo in Frankfurt, Germany, January 23, 2020. REUTERS/Ralph Orlowski

By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) -The European Central Bank pledged on Thursday to keep interest rates at record lows for even longer to boost sluggish inflation and warned that the rapidly spreading Delta variant of the coronavirus poses a risk to the euro zone's recovery.

The central bank of the 19 countries that share the euro said it would not hike borrowing costs until it sees inflation reach its 2% target "well ahead of the end of its projection horizon and durably" -- a controversial decision that generated significant dissent.

"We did so to underline our commitment to maintain a persistently accommodative monetary policy stance to meet our inflation target," ECB President Christine Lagarde told a news conference.

She said the ECB wants to see inflation head to 2% by the mid-point of its forecast horizon, which currently stretches to 2023 and is extended by one year every December, and that any deviation above the target should be incidental.

The ECB's previous guidance said it would keep interest rates at current levels until it was happy that inflation expectations were converging to its target, and stop buying bonds for its quantitative easing programme shortly before that.

But a significant group within the 25-member Governing Council presented various objections to the wording and while Lagarde managed to win over most dissenters, Bundesbank chief Jens Weidmann and Belgian central bank governor Pierre Wunsch held out, four sources close to the discussion said.

"It was an unusually robust debate, and a lot more than just two people voiced concerns, but most were eventually won over by Lagarde," one of the sources said.

The shift in language was prompted by the ECB's new strategy, unveiled earlier this month, under which inflation may be allowed temporarily to exceed its target when "especially forceful or persistent" monetary support is needed.

Inflation has undershot the target for most of the last decade, even with rates slashed to record lows and stimulus pumped in.

"The new forward guidance is consistent with the ECB hiking rates even later than under the previous framework (but) it does not fundamentally change the criteria that will trigger policy normalisation," said Frederik Ducrozet, a strategist at Pictet..

Yet others felt the ECB was not going far enough.

"Unsurprisingly the ECB's grand new mandate interpretation looks worryingly like the old one with a pretty bow on it," said James Athey, investment director at Aberdeen Standard Investments.

The euro strengthened against the dollar after Lagarde's news conference while yields on euro zone government bonds fell.

William De Vijlder, chief economist at BNP-Paribas, said the currency's move showed the ECB is now perceived to be less accommodative than the U.S. Federal Reserve, which is targeting average realised inflation rather than focusing on expectations.

COMPROMISE

Governors from more indebted countries such as Portugal and Italy had come out in force before the meeting to argue that the new strategy means the ECB should keep the money taps wide open for even longer.

But inflation hawks, who favour tighter policy and tend to come from less indebted countries like Germany, have been more cautious as they expect price pressures to return sooner.

The ECB expects inflation in the euro zone as a whole to hit 1.9% this year before falling back to 1.5% in 2022 and 1.4% the year after.

Financial markets are not pricing in an interest rate hike for at least three years. The ECB last raised rates in July 2011.

COVID AND INFLATION

The ECB's inflation goal has slipped further from its grasp since the onset of the coronavirus pandemic, which Lagarde said remains a threat.

"The recovery in the euro area economy is on track," she said. "But the pandemic continues to cast a shadow, especially as the Delta variant constitutes a growing source of uncertainty."

The ECB has pledged to continue its 1.85 trillion euro ($2.18 trillion) Pandemic Emergency Purchase Programme (PEPP) until the "crisis phase" of the pandemic is over and at least until March 2022.

It will soon need to decide when to stop it and whether to replace it, at least in part, with other schemes.

Conservative policymakers argue that the COVID-19 emergency is fading so the ECB needs to give up its extraordinary powers and revert to more traditional measures, bound by stricter rules and with a narrower focus on getting inflation back to target.

But doves who back an easier policy stance have warned about the risk posed by the Delta variant, which has already caused containment measures to be partially reinstated in some euro zone countries.

($1 = 0.8481 euros)

ECB pledges low rates for longer as virus casts shadow over growth
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
Connecticut Yankee
A_Jaundiced_Eye Jul 22, 2021 9:52AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
European Weimar Union.  These Euro bonds will be used like currency soon - people will be using them to buy pizza on the street.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email