ECB holds interest rates, eyes inflation

The European Central Bank (ECB) decided to leave the interest rates on the main refinancing operations, the marginal lending facility and the deposit facility unchanged at 0.00 per cent, 0.25 per cent and -0.50 per cent, respectively, as analysts expected. This was announced in a press release on Thursday.

The euro moved slightly higher against the dollar to $1.19. The pound rose slightly against the euro to 1.17.

Chief Economist Philip Lane has warned that any excessive tightening in financial conditions would be inconsistent with the bank’s goal of getting inflation back to target, while influential Governing Council Member Isabel Schnabel has espoused similar concerns, arguing that a premature tightening of financial conditions may withdraw policy support too early and abruptly.

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 per cent, within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.

Net asset purchases under Pandemic Emergency Purchase Programme (PEPP) will continue with a total envelope of €1.9 trillion until at least the end of March 2022. The envelope can be recalibrated if required to maintain favourable financing conditions to help counter negative pandemic shock to the path of inflation.

Net purchases under the asset purchase programme (APP) will continue at a monthly pace of €20 billion. The Governing Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.

Finally, the Governing Council will continue to provide ample liquidity through its refinancing operations. In particular, the third series of targeted longer-term refinancing operations (TLTRO III) remains an attractive source of funding for banks, supporting bank lending to firms and households.