Europe’s monetary watchdogs are setting the pace: After a new strategy has been defined, the monetary policy outlook is now to be revised. ECB President Lagarde also promises clearer language.
Initially, economists did not expect much from the July meeting of the European Central Bank (ECB).
But after Europe’s monetary watchdogs tied down their revised monetary policy strategy, including a more flexible inflation target, two weeks ago, the meeting of the Governing Council today has become significantly more important.
ECB President Christine Lagarde herself recently raised expectations in an interview with Bloomberg TV: “It will be an important meeting.” There will be “some interesting variations and changes,” said the Frenchwoman. The central bank in Frankfurt will announce the results of the deliberations in the afternoon (1:45 p.m.).
The central bank will almost certainly fine-tune its longer-term outlook. Lagarde announced that there will be a review of the so-called forward guidance in order to bring it into line with the new strategy that has now been formulated.
The core element of the revised strategy is greater room for maneuver when it comes to inflation: In future, the central bank is aiming for an annual inflation rate of two percent for the 19 countries in the euro area. At least temporarily, the ECB wants to accept if this mark is moderately exceeded or undercut. So far, the ECB’s inflation target has been “below but close to two percent”.
Economists assume that the central bank will place the term “persistence” prominently in its forward guidance. Even after the last interest rate meeting six weeks ago, Lagarde had pleaded for a policy of the steady hand and nipped in the bud hopes of an early exit from the policy of cheap money and the billion-dollar emergency aid in the corona crisis. “Now is not the time to talk about an exit strategy,” affirmed Lagarde last week. “We have to be very flexible and not arouse the expectation that the exit will take place in the next few weeks or months.”
The particularly flexible emergency purchase program for government bonds and corporate securities (Pandemic Emergency Purchase Program / PEPP) launched during the pandemic is to run until at least the end of March 2022. After that, it could “possibly … move into a new format,” said Lagarde.
Some central bankers have already proposed to transfer parts of the 1.85 trillion euro program to the central bank’s general security purchases (APP) after its expiry. Commerzbank chief economist Jörg Krämer sees his assessment confirmed “that the currently approved volume of the PEPP is not the end of the flagpole”.
The ECB’s bond purchases help states and companies alike: They don’t have to offer such high interest rates for their securities if a central bank is a big buyer in the market. This is particularly important for states because during the Corona crisis they launched rescue programs worth billions that need to be financed.
There is no end in sight to the low interest rates in the euro area. The ECB has kept the key interest rate in the euro area at a record low of zero percent for almost five and a half years. Commercial banks now also have to pay 0.5 percent interest when they park money at the central bank.
Lagarde wants to change something else: communication. There will be “a slightly different presentation of our monetary policy decision,” said the ECB President in the Bloomberg interview. “And I very much hope that it will be clearer, simpler, more concise, to the point and as little jargon (…) as possible.”
Jane Stock is a technology author, who has written for 24 Hours World. She writes about the latest in technology news and trends, and is always on the lookout for new and innovative ways to improve his audience’s experience.
