Sunday, August 14

The ECB maintains stimuli at a “moderate pace” in the face of rising prices

The European Central Bank maintains its policy unchanged, in case it announces a “slight reduction” in the pace of asset purchases compared to previous months, and resists pressure to announce an increase in interest rates, although it admits that inflation it is being higher than expected. The Governing Council has therefore confirmed “the level of the ECB’s official interest rates, its indications on its possible future evolution, its purchases under the Asset Purchase Program (APP), its reinvestment policies and its longer-term financing operations. ”

The ECB reduces economic stimuli “moderately” in the face of rising inflation and recovery

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In this sense, the ECB foresees “the stabilization of inflation at 2% in the medium term, which may imply a transitional period in which inflation is moderately above that level”.

“We expect inflation to increase more this year, but we continue to expect it to decline over the next year,” acknowledged Lagarde, who has indicated that the high inflation phase “will last longer than expected.” Why? Due to energy prices, a demand that exceeds supply after the end of the pandemic restrictions and due to taxes in some countries. “” Rising energy prices, recovery in demand and supply bottlenecks are driving inflation up. We expect the influence of the three factors to moderate over the next year, “said the President of the ECB.

Lagarde also pointed out that the economy of the euro zone countries “continues to recover strongly, although at a more moderate pace.”

Analysts consulted by Reuters predict that a price increase could hit 4%, double the ECB’s target this year, and will likely recede more slowly than the ECB has acknowledged. Even if temporary, such a price increase can fuel underlying price pressures and, if prolonged, affect wages.

Higher energy prices can also force companies to adjust their pricing behavior to account for higher costs.

It is expected that in December the ECB may decide to end the emergency stimulus next March, but could draw up another support plan to take over and keep borrowing costs low.

Meanwhile, the ECB will continue to make asset purchases under the Pandemic Emergency Program (PEPP) with a total endowment of € 1.85 trillion “at least until the end of March 2022 and, in any case, until it considers that the crisis phase of the coronavirus is over. ” And he adds: “The Governing Council continues to consider that favorable financing conditions can be maintained with a purchase rate slightly lower than in the second and third quarters of this year.”

Thus, the ECB “will make purchases flexibly in accordance with market conditions and with a view to avoiding a tightening of financing conditions that is incompatible with the objective of counteracting the negative impact of the pandemic on the projected inflation path. If favorable financing conditions can be maintained with asset purchase flows that do not deplete the PEPP endowment during the program’s net purchase horizon, it will not be necessary to use its endowment in full. Also, this endowment can be recalibrated if necessary to maintain favorable financing conditions that contribute to counteracting the negative impact of the pandemic on the path of inflation “.