Euro Area: ECB leaves monetary policy stance unchanged in June; raises inflation forecasts

Euro Area Monetary Policy June 2021

Euro Area: ECB leaves monetary policy stance unchanged in June; raises inflation forecasts

At its meeting on 10 June, the European Central Bank (ECB) kept rates on the main refinancing operations, the marginal lending facility and the deposit facility at their respective all-time lows of 0.00%, 0.25% and -0.50%, and it left the total amount of its stimulus measures unchanged. Moreover, the Bank reaffirmed that it expects net asset purchases under the pandemic emergency purchase program (PEPP) to be substantially higher in the second quarter than in the first months of the year, in order to prevent financing conditions from tightening and to sustain the recovery.

The economy contracted again in Q1, constrained by tighter Covid-19 containment measures throughout the currency union, while inflation rose to 2.0% in May, although the Bank ascribed the acceleration to transitory factors such as a low base effect and higher energy prices. Meanwhile, the Bank raised its inflation projections, and now sees inflation averaging 1.9% this year and 1.5% in 2022. Moreover, GDP growth forecasts were also raised to 4.6% for 2021 and 4.7% for 2022. However, the Bank noted that there is “still significant economic slack that will only be absorbed gradually”, which supported its decision to stand pat. Risks surrounding the short-term outlook are now seen as balanced, with downside risks stemming from virus mutations and tighter financial conditions, while upside risks stem from a larger-than-expected use of accumulated savings once restrictions are lifted.

Against this backdrop, the Bank reiterated that “an ambitious and coordinated fiscal stance remains crucial” to support the recovery, and that fiscal measures must “remain temporary and countercyclical, while ensuring that they are sufficiently targeted in nature”. The ECB once again highlighted how critical the implementation of productivity-enhancing structural policies will be to raise potential growth and increase economic resilience.

Commenting on the latest decision and possible future moves, Carsten Brzeski, chief Eurozone economist at ING, noted:

“The ECB is obviously buying time despite higher inflation prints and the prospects of accelerating inflation. With hard data not yet matching the optimism reflected in strong soft indicators, the ECB would rather err to the downside than withdraw monetary stimulus prematurely. […] Where will we go from here? Strictly taken, tapering is built into the current asset purchases as the PEPP will end in March 2022 if not extended. As soon as hard data start to catch up with strong soft indicators, confirming the view of a substantial rebound of the eurozone economy, support for asset purchases under the umbrella of pandemic-fighting will drop. The 9 September meeting could be the moment at which the ECB will at least start philosophising about tapering.”

Meanwhile, commenting on the outlook, Nicola Nobile, lead economist at Oxford Economics, stated:

“We expect monthly asset purchases under the PEPP of about €80bn per month until September to prevent surging inflation from pushing bond yields higher, which risks undermining financing conditions at an early and fragile state of the recovery. On a longer-term horizon, the weak growth and inflation outlooks mean that we still expect monetary conditions to remain ultra-loose for an extended period. We do not expect interest rates to start to rise until mid-2024.”

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