Euro Area Monetary Policy September 2021

Euro Area: The ECB slows pandemic asset purchases amid mounting inflationary pressures in September

September 9, 2021

At its meeting on 9 September, the European Central Bank (ECB) announced it will conduct net asset purchases under the pandemic emergency purchase program (PEPP) at a “moderately lower pace” than in the first two quarters of the year, when it amounted to around EUR 80 billion per month. The decision was driven by mounting inflationary pressures and a brighter growth outlook for the currency area. Meanwhile, it 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%, and it left its other stimulus measures unchanged, thus holding a significantly expansionary monetary policy stance.

The ECB revised its growth projections for this year upwards from 4.6% to 5.0%, following a stronger-than-anticipated performance of the economy in the second quarter, and expects GDP to expand 4.6% and 2.1% in 2022 and 2023, respectively. Moreover, it forecasts headline inflation to come in at 2.2% this year (previous forecast: 1.9%), 1.7% in 2022 and 1.5% in 2023. Additionally, President Lagarde pointed to rising underlying inflation pressures, and also stated that price pressures could reveal to be more persistent than previously imagined. This, together with August’s headline inflation reading of 3.0%, were behind the Bank’s decision to tweak, albeit only slightly, its crisis stimulus measures.

The Bank reiterated 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”.

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

“At today's meeting the ECB finally caught up with reality, at least a little bit, by adjusting the size of asset purchases to what the ECB had already done over the summer and, more importantly, finally giving in on the full benign neglect of inflationary pressures.”

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 September 2021

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


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