ECB holds policy unchanged, keeping stimulus taps wide open

Analysis-Latest ECB rate-hike pushback turns euro into falling knife
Analysis-Latest ECB rate-hike pushback turns euro into falling knife   -   Copyright  Thomson Reuters 2021   -  
By Reuters

<div> <p><span class="caps">FRANKFURT</span> – The European Central Bank left policy unchanged on Thursday as widely expected, holding fire before a set of crucial decisions in December on ending pandemic emergency stimulus and returning policy to a more normal setting.</p> <p>Confirming its policy stance, the <span class="caps">ECB</span> will continue to buy bonds at a “moderately lower” pace this quarter than in the preceding six months, aiming to keep down borrowing costs while the economy rebounds from the pandemic. </p> <p>It also maintained its guidance to keep interest rates exceptionally low for years to come, a stipulation increasingly challenged by financial investors, who are doubting the <span class="caps">ECB</span>’s narrative on inflation.</p> <p>The guidance calls for steady or lower rates until inflation rises back to the <span class="caps">ECB</span>’s 2% target by the middle of its projection horizon and holds there on a durable basis. </p> <p>That is not likely to happen for years to come according to the <span class="caps">ECB</span>’s projections, yet markets now expect a rate hike before the end of 2022 as inflation is seen settling higher after its current spike than policymakers predict. </p> <p>Consumer price growth is expected to hit 4% this year before a steady decline next year but the <span class="caps">ECB</span> and financial investors differ on how quickly and how far price growth will sink back over the coming years. </p> <p>Speaking to reporters at a 1230 <span class="caps">GMT</span> news conference, <span class="caps">ECB</span> President Christine Lagarde is expected reaffirm the bank’s long-standing narrative that inflation over the medium term will remain below target, so that conditions for a rate rise next year will not be met. </p> <p>She is also likely to argue that wage growth, a necessary component of durable inflation, is so muted that the risk of durably higher inflation remains low. </p> <p>Lagarde is nevertheless expected to acknowledge that inflation pressures are rising and that risks for price growth are skewed towards the upside.</p> <p>In December, the <span class="caps">ECB</span> is expected to decide on winding down pandemic-era emergency stimulus and likely replacing the lost support with more traditional measures. </p> <p/> </div>