Euro Area: ECB sticks to plans to gradually reduce stimulus in February meeting

Euro Area Monetary Policy February 2022

Euro Area: ECB sticks to plans to gradually reduce stimulus in February meeting

At its meeting on 3 February, the European Central Bank (ECB) confirmed its plan to gradually reduce net purchases under the pandemic emergency purchase program (PEPP) and discontinue them at the end of March. At the same time, in order to cushion the impact of reduced monetary stimulus, it reiterated that it will raise its asset purchase program (APP) to EUR 40 billion in the second quarter of 2022 and to EUR 30 billion in Q3, before bringing it back to its current pace of EUR 20 billion from October. Meanwhile, the 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 minus 0.50%, thus holding a significantly expansionary monetary policy stance.

Inflationary pressures have continued to mount, primarily on the back of surging energy costs, which have in turn pushed up prices across many sectors, as well as food costs. The Bank consequently stated that inflation is now expected to remain elevated for longer than expected. Meanwhile, the pace of economic expansion is expected to remain subdued in the first stretch of this year due to protracted supply constraints and the spread of the Omicron variant, although the labor market continues to improve. All in all, the Bank opted to stick to its previously established plan to gradually reduce stimulus.

The Bank added that it expects “the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching 2% well ahead of the end of its projection horizon”, although this could imply “a transitory period in which inflation is moderately above target”.

Commenting on the ECB’s decision, Carsten Brzeski, chief Eurozone economist at ING, noted:

“The ECB postponed taking any next steps until the March meeting when a fresh round of macro, and particularly inflation forecasts, will be available. Lagarde opened the door to a speeding up of asset purchase reductions and a rate hike this year. Taking all this into consideration and assuming that energy prices do not dive over the next four weeks, we expect the ECB to speed up the reduction of net asset purchases and to bring them to an end in September, allowing the ECB to hike the deposit rate at least once before the end of the year.”

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