ECB Reconfirms ‘Very Accommodative’ Policy Stance

The European Central Bank left its interest rates and asset purchases unchanged on Thursday, as the resurgence of the coronavirus infections and continuing lockdowns have damped the prospects of an economic rebound later this year.

The Governing Council, led by ECB President Christine Lagarde, left key interest rates unchanged and maintained the size of the pandemic emergency purchase programme, or PEPP, at EUR 1,850 billion.

The main refi rate was held steady at a record low zero percent and the deposit rate was kept at -0.50 percent. The lending rate was held steady at 0.25 percent.

Policymakers retained the forward guidance on interest rates, saying it expects the key ECB interest rates to remain at their present or lower levels until the inflation outlook robustly converge to a level sufficiently “close to, but below, 2 percent”.

Asset purchases will continue until at least the end of March 2022 or when the coronavirus crisis phase is over, the bank reiterated.

Further, the ECB reiterated its stance from March that PEPP purchases over the current quarter would continue to be conducted at a significantly higher pace than during the first months of the year.

“The Governing Council will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation,” the bank said in a statement.

The bank also maintained the size of the monthly net purchases under the asset purchase programme at EUR 20 billion.

Policymakers decided to continue to provide ample liquidity through refinancing operations, the latest being the third series of targeted longer-term refinancing operations, or TLTRO III.

The latest operation under TLTRO III registered a high take-up of funds, the bank noted.

“The Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry,” the ECB said.

Capital Economics now expects the weekly PEPP purchases to continue around the current pace over the next few months.

Jack Allen-Reynolds, an economist at the firm reckoned that the ECB will persist with negative interest rates and sizeable monthly asset purchases for a long time.

“It will probably allow Bund yields to rise very gradually as the economy recovers over the coming years, but they will remain very low by historical standards,” the economist added.

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