European Central Bank Remains Firm on Its Current Monetary Policy

June 10, 2021 | AtoZ MarketsThe European Central Bank (ECB) said today that, despite the contraction in the first quarter of the year, the gradual reopening of the economy and the increase in vaccination campaigns suggest that economic activity will accelerate in the second half of the year.

In the short term, the central bank has stressed that the economic outlook continues to depend on the pandemic, and that the current inflation situation is due to a transitory effect.

The main cause of this phenomenon is the increase in energy prices, and that the value of prices could continue to rise in the second half of the year.

In the opinion of this writer, this broadly translates into the ECB not being concerned about the increase in inflation, and that on the contrary it considers it acceptable given the post-pandemic recovery that has been manifesting itself.

In the ECB’s words “Our new projections point to a gradual increase in underlying inflationary pressures over the projection horizon, although pressures remain subdued in the context of still significant economic slack that will only gradually be absorbed over the projection horizon. Headline inflation is expected to remain below our target over the projection horizon.”

The ECB has reconfirmed its interest in continuing to maintain an accommodative monetary policy, and that interest rates will remain low until the inflation outlook moves solidly towards a level sufficiently close to or below 2%.

The bank has also maintained its plan for net asset purchases under the Pandemic Emergency Purchase Program (PEPP), and has emphasized that such purchases will continue at an increased pace over the next quarter, and will remain in effect until inflation levels are deemed appropriate.

Remember that each month the ECB buys assets worth close to €20 billion, and will do this until such time as it deems an increase in interest rates to be necessary thus ending the current asset purchase program.

“Finally, we will continue to provide ample liquidity through our refinancing operations. The funding obtained through the third series of targeted long-term refinancing operations (TLTRO III) plays a crucial role in supporting bank lending to businesses and households” said Cristine Lagarde in her statement today.

In reference to the foreign exchange market, the ECB made clear that it continues to closely monitor exchange rate developments and their impact on inflation over the medium term, and that it stands ready to act when necessary to do so.

What Are the EBC’s Projections

The central bank expects growth to continue to improve strongly in the second half of 2021, as progress in vaccination campaigns allows for further easing of containment measures.

Over the medium term, the recovery of the euro area economy is expected to be supported by strengthening global and domestic demand, as well as continued support from both monetary and fiscal policy.

The ECB’s projections forecast annual real GDP growth of 4.6% in 2021, 4.7% in 2022 and 2.1% in 2023.

Compared to the March 2021 ECB staff macroeconomic projections, the outlook for economic activity has been revised upwards for 2021 and 2022, while it is unchanged for 2023.

ECB Is Not Worried About High Inflation Numbers

Eurostat, has said that annual inflation in the euro area rose from 1.3% in March to 1.6% in April and 2.0% in May 2021, mainly associated with higher energy prices.

However, for the bank this is normal when viewed since the temporary reversal of VAT in Germany, and when considering that in the autumn it could be even higher.

The bank expects inflation to fall again early next year, as the temporary factors disappear and global energy prices moderate.

Looking at the ECB’s words, we can conclude that the central bank is unanimously calm and in control of the inflation figures, and that low interest rates will be maintained until the end of the year unless something unpredictable happens with the pandemic.

We can also summarize that for those who expect big moves and changes from the ECB in the second half of the year the situation is not very likely, and for the ECB to act it is required that the increase in prices is extreme.

For now, the ECB’s conciliatory and calm tone will continue to be present.

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