The European Central Bank (ECB) unveiled new policy guidance on Thursday that hints at even longer support for the bloc’s struggling economy, in line with its recent commitment to boost inflation that has undershot the ECB’s 2% target for nearly a decade, according to Reuters.
Unveiling a new strategy and a tweaked inflation target just two weeks ago, the ECB said that long periods of low inflation would require “especially forceful or persistent” policy support, a hint that stimulus might be kept in place for longer than many had predicted.
The ECB stated it expects rates to remain at their present or lower levels until it sees inflation reaching its 2% target “well ahead” of the end of its projection horizon and durably for the rest of the projection horizon.
The bank explained that progress in raising underlying inflation should be “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 ECB said in a statement.
The bank earlier promised that interest rates would stay at their present or lower levels until the inflation outlook in its staff forecasts “robustly” converged to a level close to the target and underlying inflation dynamics were also showing such an upward trend.
Rate hike expectations have already been pushed out since the strategy update and markets see no increase in the bank’s deposit rate until 2024, so Lagarde may seek to conserve those expectations rather than push them out further.
Investors will also look for clues on the future pace of asset buys after the ECB kept the main parameters of both the Pandemic Emergency Purchase Programme (PEPP) and the Asset Purchase Programme (APP) unchanged.
The 1.85 trillion euro PEPP is set to run at least until next March with volumes in the third quarter significantly above levels at the start of the year. The APP will meanwhile run at 20 billion a month until just before the first rate hike.