ECB left all the monetary policy measures unchanged in September. The staff upgraded the near-term growth outlook, as well as core inflation forecasts for 2021 and 2022, suggesting the central bank’s optimism over the recovery. Policymakers continued to stress that risks to growth remain skewed to the downside and pledge to “adjust all of its instruments” as needed. The members discussed about euro’s recent appreciation, suggesting it will be closely monitored due to its potential impact on inflation. However, no imminent action to curb the strength seems to be needed.

The central bank was upbeat about the economic developments since the last meeting. President Christine Lagarde noted that “the incoming data since our last monetary policy meeting in July suggest a strong rebound in activity broadly in line with previous expectations”. She added that “domestic demand has recorded a significant recovery from low levels” but warned that “elevated uncertainty about the economic outlook continues to weigh on consumer spending and business investment”. As such, the staff projected that the economy this year would contract -8%, up from -8.7% in June’s forecast. Headline inflation is expected to steady at 0.3% this year. The reading is expected to improve to 1% (up from +0.8% in June) in 2021 and 1.3% in 2022. ECB also upgraded core inflation to 0.9% and 1.1% from 0.7% and 0.9%, respectively, for 2021 and 2022.

Against the backdrop of improved economic conditions, ECB left all its monetary policy measures unchanged. The deposit rate stayed at -0.5%, while the main refi rate and the marginal lending rate also remained unchanged at 0% and 0.25% respectively. The PEPP program will continue to run with a total envelope of 1.35 trillion euro. It also repeated the guidance that the purchases “will” continue “until at least the end of June 2021 and, in any case, until the Governing Council judges that the coronavirus crisis phase is over”. Moreover, the central bank reaffirmed that “certainly under current circumstances, it is very likely that the full envelop of PEPP will be used”.

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Concerning recent strength in the euro, Lagarde noted that the members would “carefully assess incoming information, including developments in the exchange rate, with regard to its implications for the medium-term inflation outlook”. Indeed, upward revisions on near-term GDP growth and core inflation for the coming 2 years signal that policymakers are not excessively concerned about the negative impacts of strong euro.

y/y  % 2020 2021 2022
GDP growth -8.4 5 3.2
Jun projection -8.7 5.2 3.3
Headline Inflation 0.3 1 1.3
Jun projection 0.3 0.8 1.3
Core Inflation 0.8 0.9 1.1
Jun projection 0.8 0.7 0.9

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