JAKARTA (TheInsiderStories) - The European Central Bank (ECB) maintained the key interest rates unchanged and announced to ramp up bond buying to tackle the surging yields and market sell-off. The governing council expects purchases under the pandemic emergency purchase program (PEPP) over the next quarter to be conducted at a significantly higher pace than during the first months of this year.
“We expect them to remain at their present or lower levels until we have seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2 percent within our projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics,” said president of ECB, Christine Lagarde, in a virtual conference on Thursday (03/12).
The central bank, she asserted, will continue to conduct net asset purchases under the pandemic emergency purchase program with a total envelope of EU1,85 billion (US$2.23 billion) until at least the end of March 2022 and, in any case, until the governing council judges that the coronavirus crisis phase is over.
The policymakers expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year. The central bank will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation.
In addition, she continued, the flexibility of purchases over time, across asset classes and among jurisdictions will continue to support the smooth transmission of monetary policy. Lagarde stated, if favorable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full.
“We will continue to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2023. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance,” adds by the president.
Then, net purchases under our asset purchase program (APP) also will continue at a monthly pace of EUR20 billion. The ECB expect monthly net asset purchases under the program to run for as long as necessary to reinforce the accommodative impact of our policy rates, and to end shortly before start raising the key interest rates.
The central bank also intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favorable liquidity conditions and an ample degree of monetary accommodation.
“Finally, we will continue to provide ample liquidity through our refinancing operations. In particular, our third series of targeted longer-term refinancing operations remains an attractive source of funding for banks, supporting bank lending to firms and households,” said Lagarde.
ECB will also continue to monitor developments in the exchange rate with regard to their possible implications for the medium-term inflation outlook. The policymakers stand ready to adjust all of our instruments, as appropriate, to ensure that inflation moves towards our aim in a sustained manner, she adds.
Following the strong rebound in growth in the third quarter of 2020, Euro area real GDP declined by 0.7 percent in the fourth quarter. Looking at the full year, real GDP is estimated to have contracted by 6.6 per cent in 2020, with the level of economic activity for the fourth quarter of the year standing 4.9 per cent below its pre-pandemic level at the end of 2019.
Incoming economic data, surveys and high-frequency indicators point to continued economic weakness in the first quarter of 2021 driven by the persistence of the pandemic and the associated containment measures. As a result, real GDP is likely to contract again in the first quarter of the year, noted by Lagarde.
She added, economic developments continue to be uneven across countries and sectors, with the services sector being more adversely affected by the restrictions on social interaction and mobility than the industrial sector, which is recovering more quickly. Although fiscal policy measures are supporting households and firms, consumers remain cautious in the light of the pandemic and its impact on employment and earnings.
Moreover, weaker corporate balance sheets and elevated uncertainty about the economic outlook are still weighing on business investment. Looking ahead, the ongoing vaccination campaigns, together with the gradual relaxation of containment measures – barring any further adverse developments related to the pandemic – underpin the expectation of a firm rebound in economic activity in the course of 2021.
“Over the medium term, the recovery of the euro area economy should be supported by favorable financing conditions, an expansionary fiscal stance and a recovery in demand as containment measures are gradually lifted,” said the president.
The governors projected, the annual real GDP growth at 4.0 percent in 2021, 4.1 percent in 2022 and 2.1 percent in 2023. Compared with the December 2020 projections, the outlook for economic activity is broadly unchanged. Overall, the risks surrounding the euro area growth outlook over the medium term have become more balanced, although downside risks remain in the near term.
Then, said Lagarde, Euro area annual inflation increased sharply to 0.9 percent in January and February 2021, up from minus 0.3 percent in December. The upswing in headline inflation reflects a number of idiosyncratic factors, such as the end of the temporary value added tax rate reduction in Germany.
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