Euro Area Monetary Policy July 2021

Euro Area: The ECB hints at a protracted dovish stance in first post-review meeting in July

July 22, 2021

At its meeting on 22 July, 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 third quarter than in the first months of 2021, in an attempt to help the recovery and meet the new inflation target.

A few days earlier, on 8 July, the ECB concluded its strategy review. The Bank will now move to a symmetric inflation target, with deviations of inflation above and below 2.0% deemed “equally undesirable”, in contrast to the previous target of inflation below, but close to, 2.0%. Moreover, the Bank will tolerate a transitory period in which inflation is moderately above target if negative deviations from the target threaten to become entrenched.

The Bank stated in its policy meeting that it will keep interest rates at their current or lower level “until it sees inflation reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term,” adding that this could “imply a transitory period in which inflation is moderately above target”. As such, monetary policy is likely stay expansive for longer than was expected before the strategy review.

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

“Today’s decision to stick to the front-loading of asset purchases in our view implies that there will either be significant tapering in the fourth quarter of the year or that the envelope could be increased, pushing an end of the Pandemic Purchase Programme (PEPP) beyond March 2022. […] The new strategy indeed marks a shift towards more dovishness, potentially leading to a delayed and very soft tapering as well as a further delay of any rate hike. Not a real surprise but a confirmation that the hawks at the ECB are currently having a hard time.”

Our panelists project the refinancing rate to end both 2021 and 2022 at 0.00%.

Author: Massimo Bassetti, Senior Economist

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Euro Area Monetary Policy Chart

Euro Area Monetary Policy July 2021

Note: ECB Refinancing Rate in %.
Source: European Central Bank (ECB).

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