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April 22, 2021EUROPEAN CENTRAL BANK MONETARY POLICY The European Central Bank announced today that key interest rates would remain unchanged at their current levels given the need to continue monetary policy stimulus to support economic recovery and price stability. The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively. They are expected to remain at their present or lower levels until the inflation outlook converges to a level sufficiently close to, but below the target rate of 2.0% consistently.
The resurgence of the pandemic and the associated extension of lockdowns continue to limit economic activity in the Euro Area. However, increased vaccination and the gradual easing of containment measures are expected to support economic recovery throughout the year.
The real Gross Domestic Product (GDP) in the Euro Area declined by 0.7% in the last quarter of 2020. This level of activity was 4.9% below its pre-pandemic level a year earlier. Economic activity is expected to contract again in Q1 2021 due to renewed restrictions in many parts of the region but is expected to resume growth in the second quarter.
Fiscal policy measures continue to provide support to households and businesses, but consumers remain cautious in light of the pandemic, and the impact on employment and earnings. The manufacturing sector continues to recover supported by strong global demand.
Euro Area inflation increased to 1.3% in March 2021, up from 0.9% in February. The acceleration in inflation was mostly due to strong increase in energy prices which reflected both an upward base effect and a month-to-month increase. The increase in energy prices offset the declines in food price inflation and headline inflation excluding food and energy. The recovery in domestic demand and short-term supply constraints might cause an upward pressure on inflation over the short term. Post-pandemic, the unwinding of elevated slack and supportive fiscal and monetary policies will contribute to gradual increase in inflation over medium term.
The progress with vaccine distribution is expected to allow for gradual easing of lockdowns and support a rebound in economic activity in the second half of the year. Continued fiscal stimulus combined with the recovery in domestic and global demand is expected to drive economic recovery in the Euro Area over the medium term.
Against this background, the Governing Council reconfirmed its accommodative policy stance. The measures in place include:
- Continuation of net asset purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,850 billion until at least the end of March 2022. The net purchases will continue until the COVID-19 crisis is over.
- Continuation of the reinvestment of principal payments from maturing securities purchased under the PEPP until at least the end of 2023.
- Continuation of net purchases under asset purchase programme (APP) at a monthly pace of €20 billion. Monthly net asset purchases are expected to run for as long as necessary to reinforce the accommodative impact of the policy rates, and shortly before any increase in the key ECB interest rates.
- Continuation of the third series of targeted longer-term refinancing operations (TLTRO III). These conditions will be offered only to banks that achieve a new lending performance target in order to sustain the current level of bank lending.
The Governing Council reconfirmed their stance to adjust the monetary policy instruments as needed to ensure that inflation moves toward the target rate in a sustained manner. The next scheduled monetary policy meeting of the Governing Council is on June 10, 2021.
Source: European Central Bank: Monetary Policy Decision, Remarks
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