The European Central Bank keeps bond-buying steady and says it will tolerate inflation above 2% for the first time

The European Central Bank keeps bond-buying steady and says it will tolerate inflation above 2% for the first time
Christine Lagarde is President of the European Central Bank. Thomas Lohnes/Getty Images
  • The European Central Bank kept its $2.2 trillion bond-buying package unchanged and interest rates unchanged.
  • It revised its forward guidance, saying for the first time it would tolerate inflation rising over 2%.
  • Central banks around the world are grappling with rising inflation as economies reopen from the pandemic.

The European Central Bank kept its $2.2 trillion bond-buying package steady and interest rates at record lows on Thursday, but struck a more relaxed tone on price rises, saying for the first time that it would tolerate a period where inflation is above its 2% target.

The ECB's governing council said its 1.85 trillion euro ($2.2 trillion) coronavirus bond purchase programme would continue at a faster pace than at the start of the year, in an effort to keep market interest rates low as the eurozone economy recovers from the pandemic. And it said its key deposit rate would stay at the record-low level of -0.5%, while the central bank's other rates would also remain unchanged.
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But the ECB struck a more dovish tone when it came to its so-called forward guidance on interest rates.

The central bank said it expects rates to stay at their current level or lower "until it sees inflation reaching two per cent well ahead of the end of its projection horizon [until 2023] and durably for the rest of the projection horizon."
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It said it wanted to see inflation stabilizing at two per cent over the medium term. The bank said this "may also imply a transitory period in which inflation is moderately above target."

The shift in language came two weeks after a policy review in which the ECB established a new inflation target of 2%, rather than "just below" that level. It also said inflation could rise above that level without the central bank reacting. Analysts said the change in guidance showed that the ECB was committed to keeping up support for the economy despite rising inflation. Prices rose 1.9% in the year to June and 2% in the year to May in the 19-member euro bloc, but the ECB expects inflation to dip again towards the end of the year.
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ECB President Christine Lagarde said the central bank had changed its guidance "to underline our commitment to maintain a persistently accommodative monetary policy stance to meet our inflation target."

She added: "There is still a long way to go before the damage to the economy caused by the pandemic is offset."

Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics, said: "No one expected the ECB to raise rates anytime soon, but this new CPI target and associated forward guidance has pushed out the first deposit rate hike even further in our view."
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