ECB keeps policy stance unchanged, to step up pace of bond buying

The European Central Bank (ECB) on Thursday decided to keep its monetary policy stance unchanged but said it would step up the pace of bond purchases under the pandemic emergency purchase program (PEPP) over the next quarter, reported Xinhua.

"Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year," the ECB said in a statement.

The central bank noted that it will "purchase flexibly" according to market conditions and "with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation."

The PEPP, first rolled out in March last year and expanded twice thereafter, now has a total envelope of 1.85 trillion euros (2.21 trillion U.S. dollars) and is set to run until at least the end of March 2022.

Data showed that net purchases under the PEPP amounted to 11.9 billion euros last week, slightly less than the 12 billion euros in the week before and an average of 14.9 billion euros in the previous four weeks.

The ECB said that net purchases under the regular asset purchase program will continue at a monthly pace of 20 billion euros, and that it will continue to provide ample liquidity through refinancing operations.

Eurozone key interest rates will remain at record low levels, with the base interest rate, marginal lending rate and deposit rate unchanged at 0.00 percent, 0.25 percent and minus 0.50 percent, respectively.

RISING YIELD

Higher inflation in the eurozone in recent months and an uptick in bond yields have led to fears among investors over higher market interest rates and hence higher borrowing costs, which could negatively impact the currency zone's recovery.

Data showed the euro area annual inflation climbed to 0.9 percent in January and is expected to stay on that level in February. Germany's benchmark 10-year bond yield has risen by about 0.30 percentage points since the beginning of 2021.

"Market interest rates have increased since the start of the year, which poses a risk to wider financing conditions," ECB President Christine Lagarde told a press conference on Thursday, adding that increases in market interest rates, when left unchecked, could translate into a premature tightening of financing conditions for all sectors of the economy.

However, when taking questions from journalists, Lagarde stressed that the ECB is "not doing yield curve control" or focusing on any particular segment of the yield curve.

She reiterated that the central bank aims to "preserve favorable financing conditions" over the pandemic period, the assessment of which involves a holistic and multifaceted set of indicators spanning the entire transmission chain of monetary policy, with bond yields being one of them.

Based on such a model of assessment, the Governing Council's decision to speed up bond purchases under PEPP over the next few months is made "with total consensus," Lagarde said. However, an increase may not be strongly visible in the next week, as the ECB is not "micromanaging" its operations, she added.

OUTLOOK "BROADLY UNCHANGED"

While the overall economic situation is expected to improve over 2021, there remains uncertainty surrounding the near-term economic outlook, relating in particular to the dynamics of the pandemic and the speed of vaccination campaigns, Lagarde said.

The recent upswing in inflation was because of "technical and temporary reasons," such as the end of temporary VAT rate reduction in Germany, delayed sales periods in France and Italy, and modification on the weighing of the headline inflation, as well as rising oil prices, according to Lagarde.

It is possible that inflation hits 2 percent at the end of 2021, but in the medium term, underlying price pressures remain subdued due to weak demand, Lagarde said.

The ECB staff macroeconomic projections, published also on Thursday, forecast euro area inflation to rebound sharply from 0.3 percent in 2020 to 1.5 percent in 2021, peaking at 2.0 percent in the last quarter of 2021, before dropping to 1.2 percent in 2022 and then increasing to 1.4 percent in 2023.

The outlook for economic activity is broadly unchanged from the December projections, with annual real GDP growth expected to be at 4.0 percent in 2021, 4.1 percent in 2022 and 2.1 percent in 2023, said the ECB. In the first quarter of 2021, real GDP is expected to contract slightly by 0.4 percent.

The ECB noted that the baseline scenario rests on the assumptions of a swift relaxation of containment measures from the second quarter of this year and a resolution of the health crisis in early 2022.

The March projections do not take account of the recently approved nearly 1.9-trillion-U.S.-dollar fiscal package in the United States, due to the uncertainty with respect to its size, composition and timing at the time of the cut-off date, the ECB said, adding that "spillovers to the euro area could be notable" given the size of the package.