ECB Keeps Policy Unchanged, Revises Forward Guidance But Is Less Dovish Than Expected
As expected, the ECB has left its rates and key policy metrics (QE) unchanged, while vowing to maintain a persistently accommodative monetary policy stance to meet its inflation target. No surprises there. Other unsurprising announcements:
ECB Leaves Main Refinancing Rate Unchanged at 0%
ECB to Reinvest Maturing PEPP Bonds at Least Through End-2023
PEPP to Run Significantly Faster Than at Start of Year
Committed to Persistently Accommodative Monetary Policy
Where there was a surprise, was in the ECB’s new language discussing the forward guidance emerging from its new strategic review and inflation policy, where the bank said that “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.”
As Bloomberg reminds us, the strategy review changed the ECB’s target to “2% inflation over the medium term” from “close to but below 2%.” So the big question was: How will it change its guidance on when rates change? Here’s a reminder of the old guidance:
“The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.”
And here is the redline comparison on its forward guidance:
In other words, similar to the Fed, the ECB policy will focus on the rearview mirror, tying rate moves to actual interest rate changes rather than forecasts.
The bottom line is that while the statement was tweaked largely as expected, it provided no updated guidance on future PEPP purchases, which according to some was disappointing to the doves.
The ECB statement notes rates were left unchanged, while forward guidance on rates was tweaked to reflect the new inflation mandatate, with an emphasis on realised inflation outcomes.
However, no further details were unveiled about a transition for PEPP purchases into a new format, as hinted by President Lagarde; forward guidance on asset purchases was maintained for PEPP and APP.
Accordingly, there has been some positive ticks in the EUR/USD currency, with analysts reasoning that given that market was looking for a dovish change to the statement, what we have gotten is slightly disappointing (less dovish than expected).
In kneejerk response, and confirming that most of what the ECB said had been priced in, the EUR spiked initially only to fade all gains and to last trade at 1.790, just 5 pips from its pre-ECB level.
Thu, 07/22/2021 – 07:59