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European Central Bank is holding interest rates but tweaks guidance

European Central Bank is holding interest rates but tweaks guidance

July 23, 2021: On Thursday, the European Central Bank held monetary policy steady but tweaked its guidance to reflect its recently-hiked inflation target.

The ECB has committed to purchasing 1.85 trillion euros of bonds until March 2022 as part of its Pandemic Emergency Purchase Program. Policymakers voted to keep this stimulus on the table for the time being.

Interest rates were also left unchanged, with speed on the primary deposit facility remaining at -0.5%, the benchmark refinancing rate at 0%, and the marginal lending facility at 0.25%.

However, the eurozone central bank’s Governing Council revised its forward guidance on interest rates, having upgraded its inflation target to a symmetric 2% over the medium term at its recent strategic review.

The ECB said in a statement that it expects interest rates to remain “at their present or lower levels until it sees inflation reaching two percent 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 percent over the medium term.”

“This may also imply a transitory period in which inflation is moderately above target,” it added.

The dovish tilt effectively tied inflation to interest rates and was seen as a promise to accommodate a more extended period.

The euro quickly spiked to 1.1804 against the dollar on the news but then trimmed those gains to trade back to levels near 1.1791.

Upon announcing the outcomes of its strategy review two weeks ago, the central bank vowed “especially forceful or persistent” policy support to navigate long periods of low inflation.

The latest ECB forecasts point to headline inflation of 1.9% at the end of 2021, followed by a decrease of 1.5% and 1.4% in 2022 and 2023.

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