At yesterday’s meeting the Governing Council of the ECB took the decision to keep interest rates unchanged, which was in line with the market expectations.
To be specific, the interest rate on the main refinancing operations remains at 0.00%, the interest rates on the marginal lending facility remain at 0.25% and the deposit facility will remain -0.50%.
The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics. It is worth noting that ECB has similar problem as FED (which announced that they are seeking to achieve inflation that averages 2% over time) as inflation in eurozone did not reach its target for several years now, except few months in the end of 2017. Although 5Y inflation swap index rose from March’s low of 0.7% to 1.20%, it still shows that market does not expect inflation to reach ECB target in the next 10 years, not even close.
The Council will also continue its purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of EUR 1,350bn. These purchases contribute to easing the overall monetary policy stance, thereby helping to offset the downward impact of the pandemic on the projected path of inflation. The purchases will continue to be conducted in a flexible manner over time, across asset classes and among jurisdictions. ECB noted that this allows the Council to effectively stave off risks to the smooth transmission of monetary policy. The Council will conduct net asset purchases under the PEPP until at least the end of June 2021 and, in any case, until it judges that the coronavirus crisis phase is over. The Council will reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2022. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.
Furthermore, net purchases under the asset purchase programme (APP) will continue at a monthly pace of EUR 20bn, together with the purchases under the additional EUR 120bn temporary envelope until the end of the year. The 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. The Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favorable liquidity conditions and an ample degree of monetary accommodation.
Yesterday we published a blog on our expectations from the yesterday’s meeting. In case you missed it, you can find it on the link here.
