Thursday, September 9, 2021

ECB to dial down asset purchases 'moderately' in Q4

      The European Central Bank (ECB) left its main interest rates unchanged but dialed down "moderately" its pace of asset purchases in the fourth quarter of this year from the first and second quarters while maintaining the overall target amount under its pandemic emergency purchase program (PEPP).
      The ECB, the central bank for the 19 countries that share the euro currency, kept its key interest rates steady, including the benchmark refinancing rate at 0.0 percent, the marginal lending rate at 0.25 percent and the deposit rate at minus 0.50 percent. 
     The refi and lending rate has been maintained since March 2016 and the deposit rate since September 2019.
     PEPP was created in March last year - at the height of the COVID-19 pandemic - with a size of 750 billion euros and in June it was expanded by 600 billion and then in December by another 500 billion to 1.850 trillion and its life extended to at least March 2022.
     While maintaining the overall size and life of PEPP, the ECB in March and June this year speed up the pace of its asset purchases after economic activity was hit by fresh waves of the pandemic.
    But with inflation and growth prospects in the euro area improving, the ECB today decided to slow the pace of purchases, reiterating its statement from June that purchases will be done "flexibly" to prevent a tightening of financing conditions.
     The bank's governing council expects key interest rates to remain at their present or lower levels until it sees inflation reaching 2.0 percent well ahead of the end of its forecast horizon, with underlying inflation sufficiently advanced to be consistent with inflation stabilizing at two percent in the medium term.

    The European Central Bank issued the following statement:
    

"Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the pandemic emergency purchase programme (PEPP) than in the previous two quarters. 

The Governing Council also confirmed its other measures, namely the level of the key ECB interest rates, its forward guidance on their likely future evolution, its purchases under the asset purchase programme (APP), its reinvestment policies and its longer-term refinancing operations. Specifically:

Key ECB interest rates

The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively.

In support of its symmetric two per cent inflation target and in line with its monetary policy strategy, the Governing Council expects the key ECB interest rates to remain at their present or lower levels 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. This may also imply a transitory period in which inflation is moderately above target.

Asset purchase programme (APP)

Net purchases under the APP will continue at a monthly pace of €20 billion. The Governing Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.

The Governing Council also intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

Pandemic emergency purchase programme (PEPP)

The Governing Council will continue to conduct net asset purchases under the PEPP with a total envelope of €1,850 billion until at least the end of March 2022 and, in any case, until it judges that the coronavirus crisis phase is over. 

Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the PEPP than in the previous two quarters. 

The Governing Council will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation. In addition, the flexibility of purchases over time, across asset classes and among jurisdictions will continue to support the smooth transmission of monetary policy. If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation.

The Governing Council will continue to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2023. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.

Refinancing operations

The Governing Council will continue to provide ample liquidity through its refinancing operations. In particular, the third series of targeted longer-term refinancing operations (TLTRO III) remains an attractive source of funding for banks, supporting bank lending to firms and households.

***

The Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at its two per cent target over the medium term.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today."


    www.CentralBankNews.info



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