The European Central Bank pledged to keep interest rates at record lows for even longer to help sluggish inflation in the euro zone rise back to its elusive 2% target. The central bank of the 19 countries that share the euro said it would not hike rates until it sees inflation reach its 2% target well ahead of the end of its projection horizon and durably. Inflation has lagged below that level for most of the past decade. The goal has slipped further from its grasp since the onset of the coronavirus pandemic.
The ECB said that the Governing Council 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 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. And added that this may also imply a transitory period in which inflation is moderately above target.
The ECB’s previous guidance said that it would keep interest rates where they are until it was happy that inflation expectations were converging to its target. Governors from indebted countries such as Portugal’s Mario Centeno and Italy’s Ignazio Visco came out in force before the meeting to argue that the new strategy means the ECB should keep the money taps wide open for even longer. Inflation in Germany is already set to surpass 2% this year due to temporary factors. The forward guidance will inform the ECB’s approach to fundamental decisions that must be made at coming meetings, including how to wind down its 1.85 trillion-euro ($2.18 trillion) Pandemic Emergency Purchase Programme (PEPP) and whether to replace it, at least in part, with other schemes. The ECB is also expected to change how it communicates policy, with President Christine Lagarde promising statements with less jargon.
