Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

ECB to Move Stimulus Path for New Inflation Goal: Decision Guide

Published 22/07/2021, 11:02 am
Updated 22/07/2021, 11:02 am

(Bloomberg) -- European Central Bank officials will outline on Thursday how their new inflation goal affects their intentions for future monetary policy.

Officials will have to adapt their language on interest rates, asset purchases and other tools for an updated strategy agreed earlier this month, which now aims for inflation of 2% and acknowledges that it may temporarily run higher. The discussion will pave the way for a critical debate in September on whether and how to withdraw emergency bond buying.

The backdrop is a resurgent euro-area economy that faces steep price increases, but also considerable uncertainty. Rising coronavirus cases are prompting some countries to re-tighten travel curbs, and the impact of other disasters, such as Germany’s devastating floods, is still unknown. ECB officials say inflation pressures will subside, and repeatedly caution against unwinding stimulus too soon.

Follow the decision and the press conference on our live blog

The ECB will make its policy announcement at 1:45 p.m. Frankfurt time, and President Christine Lagarde will hold a virtual media briefing 45 minutes later.

Policy Guidance

The key policy phrases due for revision include a pledge to keep interest rates at present or lower levels until inflation converges to a level “sufficiently close to, but below, 2%” -- the ECB’s old goal. Other sections are linked to interest-rate changes, such as prospects for an older bond-buying program that is set to outlive pandemic crisis measures.

Officials announced a new “symmetric” inflation target of 2% on July 8, acknowledging the possibility of temporary overshoots if a forceful or persistent policy response is needed. The Governing Council rejected changing its communication on future policy at the time, but has been heatedly debating the matter over the past week, according to officials familiar with the matter.

What Bloomberg Economics Says...

“The Governing Council will commit in its forward guidance to keeping interest rates unchanged until inflation is forecast to reach or slightly surpass 2%, and remain there for some time within the central bank’s projection period of two to three years.”

--David Powell and Maeva Cousin. Read the full note here

While the ECB’s new strategy was borne out of a decade of too-low inflation, the world is currently experiencing higher inflation as economies reopen. That’s putting pressure on central banks across the globe to reconsider their stance -- the Federal Reserve and the Bank of England have both seen officials float the prospect of withdrawing support.

In contrast, the ECB is pushing on with stimulus. Euro-area inflation accelerated to 2% recently, the highest since 2018, but is forecast to slow again and average just 1.4% in 2023.

Crisis Transition

The outcome of this week’s discussion on the likely path of rates and bond-buying -- known as forward guidance -- will lay the foundation for another crucial decision.

In September, when new economic forecasts are available, the ECB is expected to shed light on how it plans to phase out emergency bond purchases, which are currently set to run through March 2022. Economists expect buying will start slowing in October and end as planned.

The program has been running at an accelerated pace since March, when officials argued that strict lockdowns in the region and tighter financing conditions spilling over from the faster U.S. recovery warranted extra support. With Europe’s recovery now well on track, officials have signaled they’re unlikely to expand their crisis program’s overall size of 1.85 trillion euros ($2.2 trillion).

Plain English

While the key focus for investors and economists will be on changes to the Governing Council’s policy statement, Lagarde’s press conference is likely to be more interesting than usual. It’ll be the first to reflect some of the communication changes agreed upon in the strategy review.

Lagarde has promised more “plain English” in her opening statement, as the Fed did in its own review. Her challenge will be to deliver simpler language aimed at a broader audience while still convincing investors that the ECB is committed to its goal.

“It’s going to be an important meeting,” she said in a recent interview with Bloomberg TV. “Given the persistence that we need to demonstrate to deliver on our commitment, forward guidance will certainly be revisited.”

©2021 Bloomberg L.P.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.