The dance of interest rates

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After slightly adjusting the pace of purchases at last month's meeting, as expected the ECB decided not to make any substantial changes to its strategy at the October meeting. Interest rates and securities purchase plans remain unchanged, probably in anticipation of more important decisions being taken in December, although it is confirmed that the pace of purchases of the Pepp (pandemic emergency purchase program) will be moderately lower than in the second and third quarters of the year.

RATES UNCHANGED

The other measures, namely the level of the ECB's key interest rates, forward guidance on their likely future development, purchases under the Asset Purchase Program (AAP), reinvestment policies and longer-term refinancing operations, are also confirmed.

Interest rates on the main refinancing operations, the marginal lending facility and deposits with the central bank will remain unchanged at 0.00%, 0.25% and -0.50%, respectively.

"In support of its symmetric inflation target of 2%," reads the ECB's note, "and in line with its monetary policy strategy, the Governing Council expects the ECB's key interest rates to remain at or below their current levels until it sees inflation reaching 2% well before the end of its projection horizon and on a sustained basis for the remainder of the projection horizon, and until it believes that the progress achieved by core inflation is sufficiently advanced to be consistent with inflation stabilizing at 2 percent over the medium term.
This also may involve a transition period in which inflation is at a level moderately above the target."
AAP

Net purchases within the framework of the AAP (asset purchase program) will continue at a monthly pace of 20 billion euros. The Governing Council continues to expect that the monthly net purchases under the AAP will be conducted as long as necessary to reinforce the accommodative impact of its policy rates and will end shortly before the ECB starts to raise its policy rates.

The Governing Council also intends to continue to reinvest, in full, the principal repaid on maturing securities under the EAP for an extended period of time after the date on which it begins to raise the ECB's key interest rates and, in any event, for as long as necessary to maintain favorable liquidity conditions and a broad degree of monetary accommodation.
PEPP

The Governing Council will continue to conduct net asset purchases under the PEPP, with a total budget of €1,850 billion, at least until the end of March 2022 and, in any case, until it deems the critical phase related to the coronavirus to be over. The Governing Council continues to believe that favorable funding conditions can be maintained with a moderately lower pace of net asset purchases under the PEPP than in the second and third quarters of the year. Purchases will be conducted in a flexible manner based on market conditions, with the aim of avoiding a tightening of funding conditions incompatible with counteracting the downward effect of the pandemic on the expected inflation profile. In addition, the flexibility of purchases over time, across asset classes and countries will continue to support the orderly transmission of monetary policy.

POSSIBILITY OF RECALIBRATING PURCHASES

If favorable financing conditions can be maintained through asset purchase flows that do not exhaust the envelope over the PEPP net purchase horizon, the envelope will not have to be fully utilized.

Similarly, the envelope can be recalibrated if necessary to preserve favorable funding conditions that help counter the negative pandemic shock to the inflation profile. The Governing Council will continue to reinvest the principal repaid on maturing securities under the PEPP until at least the end of 2023.

In any case, the future reduction of the PEPP portfolio will be managed in such a way as to avoid interference with the appropriate monetary policy stance.

CHRISTINE LAGARDE'S POINT.

Growth in the economy continues but with "some signs of moderation due to supply problems that are weighing on some sectors," Christine Lagarde explained at a press conference in Frankfurt. GDP is expected to return to pre-Covid levels by the end of the year.

WEAKER COVID IMPACT

For the ECB president, thanks to increased immunity to the coronavirus, the impact of the pandemic has clearly weakened. Speaking of inflation, Lagarde expects that "the current rise will be mostly transitory and will slow down in 2022," adding that underlying price pressures have approached 2%.

TEMPORARY INFLATION

Returning to the subject of rising prices, the ECB president pointed out that "the push for inflation will take longer than expected because of disruptions in supply chains and rising energy prices, but the rise is temporary and the factors driving this phenomenon will subside over the course of next year."

FISCAL AND MONETARY POLICY

To put the pandemic crisis behind us and "support the recovery, ambitious, targeted and coordinated fiscal policy should continue to complement monetary policy," Christine Lagarde added. Regarding the reduction of stimulus: "The slowdown in Pepp purchases does not represent a form of tapering but of calibration," she clarified.

PEPP WILL END AT THE END OF MARCH 2022

When will the Pepp end? "In my view at this time it will end at the end of March 2022," Lagarde replied. "I have reason to believe that it will end at the end of March 2022 which is the time horizon we originally envisioned." The conditions for raising rates are well stated in our forward guidance and these conditions will not be met in the near future.

NO STAGFLATION

There is no risk of stagnation and therefore "no stagflation either", the ECB president pointed out. And with regard to bottlenecks, Lagarde stressed that these will last longer than expected and will not be resolved during the first quarter of 2022 but during the rest of the year.

MY PERSONAL NOTES

Despite her role as ECB President, Lagarde is a politician and her words must be measured. As positive as the ECB's estimates may be, macro data at the moment do not strongly support this view (estimates have already been revised downward this fall). The biggest concern for the ECB President has been to not use words that could create panic in the financial markets by not posing ongoing inflation as an actual risk.

Thank you for reading

CREDITS

The photo "burning dollars" by Jp Valery is released under the Unsplash license free to use

Posted Using LeoFinance Beta



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