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The European Central Bank came out on Thursday as markets had expected. The bank decided to slow down in bond purchases and raised the inflation forecast. Policymakers emphasized that the change is not “Tapering” as the change will be on the PEPP, not APP as the bank strengthens its growth forecast for the year 2021 but lowers the GDP forecast for 2022 by 0.1%.
“The lady isn’t tapering,” ECB President Christine Lagarde told a news conference to explain the decision, using a turn of phrase reminiscent of former British Prime Minister Margaret Thatcher’s famous declaration “the lady’s not for turning”.
The market sensed the optimism of the European Central Bank after the meeting; Lagarde confirmed that the current increase in inflation is expected to be temporary. She described the progress as sufficiently advanced, and the economy is expected to return to its average size by the end of the year, which led investors to believe that the European Central Bank will confirm In December on the end of PEPP in 2022 as planned
The interest rate on the main refinancing operations will remain at 0.00%, the interest rates on the marginal lending facility at 0.25%, and the deposit facility at 0.50%. Thus, the Governing Council expects ECB interest rates to remain at current levels or lower until the Bank sees its 2% inflation target well before the end of the year.
Net purchases under the APP will continue at a monthly pace of €20 billion, and The Governing Council expects purchases under the APP to continue for as long as necessary. Furthermore, the Governing Council intends to continue reinvestment of principal payments from maturing securities purchased under the APP for a more extended period after the date on which the rate hike will begin.
The Governing Council will continue to conduct net asset purchases under PEPP of €1,850 billion through the end of March 2022 and until the coronavirus pandemic ends. The ECB Governing Council believes that favorable financing conditions can be maintained with a fairly low pace of net asset purchases under the PEPP based on the inflation outlook.
“It is certainly our determination to continue to provide the necessary support in order to maintain favourable financing conditions, in a completely data-dependent and flexible manner, in order to make sure that the recovery is not just a rebound,” Christine Lagarde, President of the Europen Central Bank (ECB), reiterated on Friday
The European Central raised its long-term estimates of inflation in the eurozone to 2.2% in 2021, 1.7% in 2022, and 1.5% in 2023. With the exception of food and energy, the central bank raised its estimates of consumer price inflation to 1.3% and 1.4% and 1.5% for the years 2021, 2022 and 2023, respectively.
The EUR/USD rose to 1.1835 against the previous daily closing at 1.1823. However, the pair fell to its lowest level during the day to 1.1818, compared to the high of 1.1851.
