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European Central Bank (ECB)

‘The lady's not for tapering’ - Lagarde

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Paraphrasing the late British Prime Minister and monetarist Margaret Thatcher, in a phrase that she would be unlikely to have uttered, European Central Bank President Christine Lagarde announced today that ‘the lady is not for tapering’.

Based on a joint assessment of financing conditions and the inflation outlook, the central bank’s governing council has decided that net asset purchases under the pandemic emergency purchase programme (PEPP) can continue, but at a more moderate pace.  

The council also agreed to keep interest rates as they are, saying that they expect the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching two per cent, but allowing for a transitory period in which inflation may rise moderately above its target.

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Inflation outlook

Lagarde acknowledged that people in many eurozone countries are experiencing price increases, but she said that when the bank “looks under the skin of inflation” their outlook leads them to believe that it will be 1.5% by the end of the projected horizon.

Lagarde highlighted the impact of energy prices, but also pointed to the price rises due to supply chain bottlenecks linked to the economy opening up again. The bank anticipates that this will be largely temporary in nature, but acknowledges that it could result in upside pressure on prices if it continues for longer than expected. 

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On wages, Lagarde said that the ECB had not yet seen evidence of a significant increase in prices, but will be attentive to this as negotiations take place in the autumn. In any event, she expects wage growth to be moderate and gradual.

European Central Bank (ECB)

ECB must tighten policy if needed to counter inflation, Weidmann says

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The headquarter of the European Central Bank (ECB) is photographed during sunset, as the spread of the coronavirus disease (COVID-19) continues in Frankfurt, Germany, April 28, 2020.   REUTERS/Kai Pfaffenbach

The headquarter of the European Central Bank (ECB) is photographed during sunset, as the spread of the coronavirus disease (COVID-19) continues in Frankfurt, Germany, April 28, 2020. REUTERS/Kai Pfaffenbach

The European Central Bank must tighten monetary policy if it needs to counter inflationary pressures and cannot be put off from doing so by the financing costs of eurozone states, ECB policymaker Jens Weidmann (pictured) told the Welt am Sonntag newspaper, writes Paul Carrel, Reuters.

Eurozone countries have ramped up their borrowing to cope with the coronavirus pandemic, potentially leaving them exposed to increased debt servicing costs if the central bank tightens policy to counter upward pressure on prices.

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"The ECB is not there to take care of the solvency protection of the states," said Weidmann, whose role as president of Germany's Bundesbank gives him a seat on the ECB's policymaking Governing Council.

Should the inflation outlook rise sustainably, the ECB would have to act in line with its price stability objective, Weidmann said. "We have to make it clear again and again that we will tighten monetary policy if the price outlook calls for it.

"We cannot then take into account the financing costs of the states," he added.

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After its July 22 policy meeting, the ECB pledged to keep interest rates at record lows for even longer to boost sluggish inflation, and warned that the rapidly spreading Delta variant of the coronavirus posed a risk to the eurozone's recovery. Read more.

"I do not rule out higher inflation rates," the paper quoted Weidmann as saying. "In any case, I will insist on keeping a close eye on the risk of an excessively high inflation rate and not only on the risk of an excessively low inflation rate."

The euro zone economy grew faster than expected in the second quarter, pulling out of a pandemic-induced recession, while the easing of coronavirus curbs also helped inflation shoot past the ECB's 2% target in July, hitting 2.2%. Read more.

When the ECB decides it is time to tighten policy, Weidmann expected the central bank would first end its PEPP emergency bond purchase programme before scaling back its APP purchase plan.

"The sequence would then be: first we end the PEPP, then the APP is scaled back, and then we can raise interest rates," he said.

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Digital economy

Digital euro: Commission welcomes the launch of the digital euro project by the ECB

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The Commission welcomes the decision taken by the Governing Council of the European Central Bank (ECB) to launch the digital euro project and start its investigation phase. This phase will look at various design options, user requirements and at how financial intermediaries could provide services building on a digital euro. The digital euro, a digital form of central bank money, would offer greater choice to consumers and businesses in situations where physical cash cannot be used. It would support a well-integrated payments sector to respond to new payment needs in Europe.

Taking into account digitalisation, rapid changes in the payments landscape and the emergence of crypto-assets, the digital euro would be a complement to cash, which should remain widely available and useable. It would support a number of policy objectives set out in the Commission's wider digital finance and retail payments strategies including the digitalisation of the European economy, increase the international role of the euro and support the EU's open strategic autonomy. Based on the technical co-operation with the ECB initiated in January, the Commission will continue to work closely with the ECB and the EU institutions throughout the investigation phase in analysing and testing the various design options in view of policy objectives.

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European Central Bank (ECB)

ECB to change policy guidance at next meeting, Lagarde says

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The European Central Bank will change its guidance on the next policy steps at its next meeting to reflect its new strategy and show it is serious about reviving inflation, ECB President Christine Lagarde said in an interview aired on Monday (12 July), writes Francesco Canepa, Reuters.

Announced last week, the ECB's new strategy allows it to tolerate inflation higher than its 2% goal when rates are near rock bottom, such as now.

This is meant to reassure investors that policy won't be tightened prematurely and boost their expectations about future price growth, which has lagged below the ECB's target for most of the past decade.

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"Given the persistence that we need to demonstrate to deliver on our commitment, forward guidance will certaintly be revisited," Lagarde told Bloomberg TV.

The ECB's current guidance says it will buy bonds for as long as necessary and keep interest rates at their current, record-low levels until it has seen the inflation outlook "robustly converge" to its goal.

Lagarde did not elaborate on how that message might change, simply saying the ECB's aim will be to keep credit easy.

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"My sense is that we will continue to be determined by maintaining favourable financing conditions in our economy," she said.

She added this was not the right time to talk about dialing back stimulus and that the ECB's Pandemic Emergency Purchase Programme, which is worth up to 1.85 trillion euros, could "transition into a new format" after March 2022, its earliest possible end-date.

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