ECB to boost emergency bond buys, keeps rates unchanged
The European Central Bank has left its key interest rates unchanged after today’s Governing Council meeting.
However, the ECB has said it expects to buy bonds under its Pandemic Emergency Purchase Programme (PEPP) “…at a significantly higher pace than during the first months of this year.”
The size of the PEPP at €1.85 trillion remains the same.
The ECB says the programme will continue until March 2022 or until the bank “judges that the coronavirus crisis phase is over.”
The ECB also said it expects its key interest rates to remain “at their present or lower levels” until it has seen the outlook for inflation “robustly converge” to close to, but below, the target rate of 2%.
It added that this would have to be “consistently reflected in underlying inflation dynamics.”
This means, the ECB will wait until it believes inflation has really increased before it makes any move on its interest rates.
Rates are normally raised to help control inflation.
The latest estimate for inflation in the euro zone in February was 0.9%. It was -0.3% in December.
There is much debate over whether this recent increase in inflation is down to some temporary factors like the reversal of a cut last year in Germany’s VAT rate.
Euro zone growth is currently weaker than forecast as a new wave of the coronavirus pandemic and a painfully slow vaccine rollout are requiring longer lockdowns, challenging expectations for a rapid rebound in the spring.
The President of the European Central Bank has said persistently high levels of the coronavirus, the spread of mutations and the continuation of restrictions are weighing on economic activity in the euro zone in the short term.
However, Christine Lagarde said the ECB still expects “a firm rebound” in the euro zone economy later this year when vaccination programmes kick in.
The ECB estimates that euro zone GDP fell by 0.7% in the last three months of 2020 and stood 4.9% lower than economic activity at the end of 2019, pre-pandemic.
Overall, euro zone GDP fell by 6.6% in 2020. The ECB said it expects growth to contract in this first three months of this year.
This means the euro zone will experience a so-called double-dip recession as countries in Europe continue to tackle the impact of the coronavirus pandemic.
But the ECB believes a rebound later this year will deliver an average growth rate of 4%.
Euro area inflation rose sharply in January and February to 0.9% compared to -0.3% in December.
Several once-off factors like the reversal of a temporary VAT cut in Germany, were cited as reasons for this.
However, Ms Lagarde said the ECB expected that higher energy prices will feed into higher inflation over the coming months.
The ECB estimates that inflation will average 1.5% this year, 1.2% next year and 1.4% in 2022.
At today’s ECB press conference, Ms Lagarde said it is possible that at the end of this year, inflation in the euro zone will hit the ECB’s target rate of 2% but this would be for “technical and temporary reasons”.
She also said the ECB expects the $1.9 trillion stimulus plan just passed by the US House of Representatives will have ‘some impact’ on Europe, but the bank has not yet factored the US plan into its projections.
Meanwhile, after today’s decision, the ECB’s key interest rate stayed at a record low -0.5%.