The President of the European Central Bank (ECB), Christine Lagarde, speaks at a press conference on the results of the ECB Council meeting on March 12, 2020 in Frankfurt am Main.
Kai Pfaffenbach | Reuters
The European Central Bank has chosen not to give a signal as to when it might start scaling back its pandemic-era stimulus plan on Thursday and expects inflation to stay below its target for the foreseeable future.
“Inflation has increased in recent months, mainly due to base effects, transition factors and an increase in energy prices. It is expected to rise further in the second half of the year before declining again as temporary factors subside,” said ECB President Christine Lagarde said at a press conference on Thursday after the bank’s regular interest rate decision.
“Our new expert projections suggest a gradual increase in underlying inflationary pressures over the projection horizon, although the pressures remain subdued given the still significant economic doldrums that are only gradually being absorbed over the projection horizon Horizon, “she added.
Recent data has shown that inflation for the 19-member currency area that shares the euro is above the ECB’s target of just under but below 2%. The ECB had previously announced that it would expect rates to rise in 2021, but only temporarily.
The data has raised questions about the future of monetary policy in the euro area, with market participants asking for answers on how long the central bank will maintain its massive monetary stimulus. The ECB has committed to buying bonds worth 1.85 trillion euros (2.2 trillion US dollars) through its Pandemic Emergency Purchase Program (PEPP) by March 2022.
On Thursday, the central bank decided to leave that stimulus on the table and its ultra-low rates were also left unchanged.
The ECB presented an update on the economic outlook in the euro zone on Thursday. The bank now expects a gross domestic product rate of 4.6% for 2021 and 4.7% for 2022 – both of which have been revised upwards.
With regard to inflation, the ECB also presented new, higher forecasts for 2021 and 2022 from an earlier assessment in March. The annual inflation rate is expected to reach 1.9% this year and 1.5% in 2022.
Carsten Brzeski, Global Head of Macro at ING Germany, said in a note that the ECB clearly wanted to avoid any taper talks at Thursday’s meeting and had therefore decided to stay there.
Andrew Kenningham, chief economist for Europe at Capital Economics, said the eurozone central bank will likely still tighten very gradually in the second half of this year.
“But the big picture is that politics will remain very accommodating for a long time to come,” he added.