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FX.co ★ ECB Leaves Rates Unchanged, Revises Forward Guidance

ECB Leaves Rates Unchanged, Revises Forward Guidance

The European Central Bank left its key interest rates unchanged on Thursday, but revised its forward guidance on the same to support its new inflation target. The central bank left the main refinancing rate at 0 percent, the deposit rate at -0.50 percent and the marginal lending rate at 0.25 percent, in line with economists' expectations. On July 8, the ECB had adopted a symmetric 2 percent inflation target that will allow a temporary overshoot in inflation and decided to incorporate climate change considerations into its policy framework, following a monetary policy review that was launched last year.

Policymakers on Thursday decided to revise its forward guidance on interest rates as the key ECB interest rates have been close to their lower bound for some time and the medium-term outlook for inflation is still well below the Governing Council's target. "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 realized progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilizing at two per cent over the medium term," the bank said. "This may also imply a transitory period in which inflation is moderately above target."

The "refurbished" policy statement is a shift towards more dovishness, ING economist Carsten Brzeski said. The provision for a transitory period, during which inflation will remain moderately above target, is a clear message that rates will remain low for even longer, the economist added.

ECB said it revised its guidance to underline its commitment to maintain a persistently accommodative monetary policy stance to meet its inflation target.

The bank said net purchases under the asset purchase program will continue at a monthly pace of EUR 20 billion and these are expected to run for as long as necessary to reinforce the accommodative impact of policy rates. APP purchases are expected to end shortly before the bank starts raising the interest rates.

Asset purchases under the Pandemic Emergency Purchase Program, or PEPP, will continue with a total envelope of EUR 1,850 billion until at least the end of March 2022 and, in any case, until the judges that the coronavirus crisis phase is over, the bank said. "The Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilizes at its two per cent target over the medium term," the bank added.

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