The European Central Bank pledged to keep interest rates at record lows for even longer to help sluggish inflation in the euro zone rise back to its elusive 2% target. The central bank of the 19 countries that share the euro said that it would not hike rates until it sees inflation reach its 2% target. Inflation has lagged below that level for most of the past decade and the goal has slipped further from its grasp since the onset of the pandemic.
The ECB said that the Governing Council expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term.
The ECB’s previous guidance said that it would keep interest rates where they are until it was happy that inflation expectations were converging to its target. But rate-setters squabbled then over how to tailor their policy path to fit that commitment. Governors from indebted countries such as Portugal’s Mario Centeno and Italy’s Ignazio Visco came out in force before the meeting to argue that the new strategy means the ECB should keep the money taps wide open for even longer.
Financial markets are not pricing in a rate hike for at least three years. The forward guidance will inform the ECB’s approach to fundamental decisions that must be made at coming meetings. Conservative policymakers argue that the COVID-19 emergency is fading so the ECB needs to give up its extraordinary powers and revert to more traditional measures. The longer-established Asset Purchase Programme, however, requires purchases in proportion to the size of each of the euro zone economies, known as the capital key, at pre-set volumes, and excludes heavily-indebted Greece because its credit rating is too low. The ECB is also expected to change how it communicates policy, with President Christine Lagarde promising “shorter, crisper” statements with less jargon.