Market Wire - European Central Bank Holds Rates and Continues Gradual Policy Normalisation
Karthik Sankaran, Senior Market Strategist: firstname.lastname@example.org
In a statement that was in line with expectations, the European Central Bank left its policy rates unchanged and signalled it would stop asset purchases in the third quarter of 2022. This could clear the way for an increase in the benchmark deposit rate, currently at -0.50 basis points, late in the third quarter - perhaps September - shortly after the end of its bond-buying activity.
Some euro bulls were disappointed by the lack of clear hawkish guidance, and the common currency dropped slightly on the decision.
Heading into the event, markets had priced 25-basis point rate increases at the September and the December meetings - although most economists have been forecasting only one hike late this year.
The Bank cited persistent price pressures, saying “Inflation has increased significantly and will remain high over the coming months, mainly because of the sharp rise in energy costs. Inflation pressures have intensified across many sectors”. It acknowledged risks to sentiment from geopolitical events, but also said, “activity is still being supported by the reopening of the economy after the crisis phase of the pandemic”.
In line with recent speeches from key policymakers, the statement reiterated a willingness to use the Pandemic Emergency Purchase Programme (PEPP) to prevent an unwarranted widening in interest rates spreads between euro area economies, saying “In the event of renewed market fragmentation related to the pandemic, PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions at any time. This could include purchasing bonds issued by the Hellenic Republic over and above rollovers of redemptions in order to avoid an interruption of purchases in that jurisdiction, which could impair the transmission of monetary policy to the Greek economy while it is still recovering from the fallout from the pandemic. Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic”.