Breaking News
Ad-Free Version. Upgrade your experience. Save up to 40% More details

ECB Issues New Guidance, Sees Bond Buying Continuing at Elevated Rate

EconomyJul 22, 2021 13:20
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters.

By Geoffrey Smith -- The European Central Bank shifted marginally in the direction of increasing monetary stimulus to the Eurozone economy Thursday, but disappointed many who had expected it to pursue its new, higher, inflation target with more zeal.

The ECB said it expects to continue buying bonds at an elevated pace over the next two months, re-asserting its determination to steer against expectations of an early tightening of monetary policy due to a spike in inflation in the first half of this year.

It also said it won't raise interest rates until its new goal of a 2% inflation rate is well within reach, and until its Governing Council thinks that underlying price pressures are  strong enough to keep it around 2% in the medium term. The new language appears designed to rule out any tightening of policy until a sustained rebound in inflation has already taken place. 

The change in the ECB's guidance comes a week after the bank adopted a new inflation target of 2%, something that allows it a slightly higher tolerance threshold for above target inflation. The ECB said that its new approach "may also imply a transitory period in which inflation is moderately above target."

The foreign exchange market was unimpressed by the announcements, leaving the euro just above $1.18, slightly higher than before the meeting. However, European government bond markets interpreted the new guidance as pushing back the end of extraordinary liquidity support for the economy. The yield on the benchmark 10-year Spanish and Italian government bonds fell by 5 and 4 basis points, respectively, in response.

"The problem with the new ECB statement is that it has no teeth," said Arne Petimezas, an analyst with AFS Group in Amsterdam "I get it that they want higher inflation and that they're more tolerant of inflation. But they're not willing to do more to reach their goal, except promises of easy policy for longer."

Eurozone inflation rebounded to around the 2% level in the second quarter, but the move was largely due to changes in energy prices, which had collapsed in the early stage of the pandemic last year. By June, however, the headline annual rate of consumer inflation had already eased to 1.9% from 2.0% in May. In the opening statement at her subsequent press conference, ECB President Christine Lagarde said that the bank expects inflation to rise further over the rest of the year, before falling back. 

"Weak wage growth and the past appreciation of the euro mean that price pressures will likely remain subdued for some time," Lagarde said. While she said the bank expects the Eurozone economy to recover to pre-pandemic output levels by the end of the first quarter of 2022, she noted that the spread of the Delta variant of Covid-19 represented a clear threat, especially to services and the tourism sector.

Her warnings came only minutes after German media reported that Berlin intends to add Spain and the Netherlands to its list of 'high risk' areas, meaning that incoming travellers from those countries who are not fully vaccinated must quarantine.  That threatens to deal another blow to Spain's tourism-heavy economy in particular.

Guntram Wolff, a director with the Bruegel think-tank in Brussels, pointed out that the wage pressures needed to create a sustained rise in inflation are still largely absent - at least in Germany, the Eurozone's largest economy, which traditionally acts as a benchmark for the rest of the bloc.

"There is no evidence in the recent data that German wage pressure is building up," Wolff argued in a blog post published before the ECB meeting. "Agreed wage increases have been lower during the pandemic and forecasts and settlements for 2022 do not suggest any unusual increase." 

There were few other concrete changes to the ECB's policy statement which, like its predecessors, remained guarded and carefully hedged despite President Christine Lagarde's previous promise of language that would be "crispier" and "straight to the point".

The bank's language on possibly not using all of the resources of its 1.85 trillion euro Pandemic Emergency Purchase Program remained unchanged, and it repeated its pledge to keep reinvesting the proceeds from maturing bonds through the end of 2023.

Lagarde said that changes to current policy hadn't figured in Thursday's debate. While some analysts argue that the bank will have to increase monetary stimulus to reach its new target - after a decade of undershooting its old one - the ECB typically prefers to change policy when it updates its forecasts for Eurozone growth and inflation. The next update is due at its policy meeting in September.

ECB Issues New Guidance, Sees Bond Buying Continuing at Elevated Rate

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email