The European Central Bank (ECB) kept its main interest rates on hold and confirmed it was ending asset purchases under its pandemic emergency purchase program (PEPP) at the end of March as the economy continues to recover and inflation is likely to remain higher than previously expected.
The ECB, the central bank for the 19 countries that share the euro currency, left its benchmark refinancing rate at 0.0 percent, the marginal lending rate at 0.25 percent and the deposit rate at minus 0.50 percent, and reiterated it expects to maintain these rates until inflation stabilizes at its target of 2.0 percent over the medium term.
The ECB, the central bank for the 19 countries that share the euro currency, left its benchmark refinancing rate at 0.0 percent, the marginal lending rate at 0.25 percent and the deposit rate at minus 0.50 percent, and reiterated it expects to maintain these rates until inflation stabilizes at its target of 2.0 percent over the medium term.
"This may also imply a transitory period in which inflation is moderately above the target," said the ECB's governing council, confirming its decision in December to end its PEPP asset purchase program - which was created in March 2020 and ultimately reached a size of 1.85 trillion euros - next month.
To cushion the impact on financial markets from ending the bond purchases, the ECB will continue to reinvest principal payments from maturing PEPP securities until at least the end of 2024 and boost its monthly asset purchases under its Asset Purchase Program (APP) from 2015 to 40 billion euros in the second quarter and then reduce it to 30 billion in the third quarter.
By October the ECB will then lower its monthly purchase of assets to the previous monthly pace of 20 billion euros and confirmed this will continue "for as long as necessary to reinforce the accommodative impact of its policy rates."
"The Governing Council expects net purchases to end shortly before it starts raising the key ECB interest rates," the ECB said, confirming earlier guidance.
The ECB's marginal tightening of its policy stance comes against a backdrop of a steady improvement in the economy although growth is likely to remain subdued in the first quarter as the current Omicron wave of the COVID-19 pandemic weighs on activity at the same time shortages of materials, equipment and labour holds back output in some industries.
However, ECB President Christine Lagarde also told a news conference the economy is affected less and less by each wave of the pandemic and the factors restraining production and consumption should gradually ease, allowing the economy to pick up speed during the year.
In the fourth quarter of last year the gross domestic product of the euro area grew 4.6 percent year-on-year for 2021 growth of a record 5.2 percent after shrinking 6.4 percent in 2020.
Inflation in December rose to a 2021-high of 5.1 percent, pushed up by energy prices, and the ECB expects inflation to remain high in the near term before declining during the year.
But Lagarde also said the risks to the inflation outlook were tilted to the upside, particularly in the near term, and the pace at which supply bottlenecks are resolved remains a risk to the outlook for both economic growth and inflation.
"We continue to see the risks to the economic outlook as broadly balanced over the medium term," Lagarde said, adding the economy could be stronger if households become more confident.
"By contrast, although uncertainties related to the pandemic have abated somewhat, geopolitical tensions have increased," she said, a clear reference to the tensions over Russia and Ukraine.
