European Central Bank (ECB) President European Christine Lagarde on Thursday said the bank has learned from the errors of past crises and would not derail the current economic recovery by withdrawing emergency support too early.
Lagarde made the remarks, as the ECB put into action the new monetary policy strategy it hammered out over the past 18 months. It revised guidance on interest rates, tying policy shifts more tightly to hitting its new 2 percent inflation goal, and said it would not necessarily react immediately if price growth exceeds that target for a “transitory” period.
The measures reinforce the ECB’s efforts to convince markets that it would keep ultra-loose policy, including record-low negative interest rates, in place for as long as needed to revive price stability.
Lagarde’s remarks reverberated across Europe’s government bond market, with investors piling into the debt of the region’s most economically vulnerable nations, such as Italy and Spain.
“It means that the new strategy indeed marks a shift toward more dovishness,” ING economist Carsten Brzeski wrote in a report.
Bloomberg Economics said it expects the central bank to pump more stimulus into the economy in September, with more asset purchases.
The ECB’s guidance change means that even if inflation is at the target at the end of its forecast horizon — as much as three years out — it would not be forced to respond with tighter policy.
Officials foresee price growth averaging just 1.4 percent in 2023, which suggests any interest rate hike is years away.
“We’re informed by past experience and by most recent history,” Lagarde told reporters.
She referred to “this element of patience” and said the new guidance is “intended to avoid premature tightening that would be detrimental to the economy.”
The remarks about learning from the past call to mind another French ECB president, Jean-Claude Trichet, who raised borrowing costs in 2011 to curb elevated inflation in what subsequently looked very ill-timed.
The hikes were quickly reversed the same year when Mario Draghi took over and the eurozone debt crisis engulfed the economy.
The ECB’s pledge of continued ultra-loose policy sets it apart from some of the world’s biggest central banks. In the US, where inflation is running above 5 percent, US Federal Reserve officials are already discussing when to start tapering their stimulus.
Some policymakers at the Bank of England have said a reduction in bond buying should be considered soon.
Lagarde said in her press conference that backing for the change was not unanimous, though there was an “overwhelming majority” behind it.
The bank also kept current tools unchanged:
‧ The deposit rate stayed at minus-0.5 percent.
‧ The 1.85 trillion-euro (US$2.2 trillion) COVID-19 pandemic bond-buying program is to continue at an elevated pace, with a scheduled end date of March next year.
‧ The older Asset Purchase Program stays at 20 billion euros a month and will only end shortly before rates start rising.
‧ The ECB will keep providing long-term loans to banks.
Some policymakers were already concerned that the currency bloc and much of the rest of the world are now seeing a sharp pickup in inflation, driven by booming demand and constrained supply as COVID-19 restrictions are withdrawn.
“Inflation has picked up though this increase is expected to be mostly transitory,” Lagarde said.
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