The ECB raises the inflation forecast but stops at the bond purchase plan

The European Central Bank is keeping pace with its bond purchases in the coming weeks, it said on Thursday, despite rising forecasts for eurozone growth and inflation.

The Frankfurt-based institution has resisted calls from some policymakers to begin monitoring its monetary stimulus as the eurozone economy recovers from the impact of the coronavirus pandemic, and has maintained its political measures. main unchanged in his last statement.

He said: “Based on a joint assessment of financing conditions and inflation prospects, the governing council expects net gains under the [pandemic emergency purchase programme (PEPP)] in the next quarter to continue to be conducted at a significantly higher rate than during the first months of the year ”.

At a press conference after the announcement, ECB President Christine Lagarde said that although the economy “gradually reopened” and inflation was forecast to continue to grow this year, the central bank predicts that price growth will fall again next year.

She added that there was still “a significant economic slack that will be absorbed only gradually over the projection horizon” and that any tightening of monetary policy would be “premature” at this stage and threaten the recovery and prospects for inflation.

Coronavirus infection levels are declining and blockages are rising across Europe. In addition, the pace of vaccinations accelerates after a slow start.

Business activity, consumer confidence and inflation have all rebounded sharply in recent weeks. The main rate of price growth hit 2 percent May, surpassing the ECB’s target below, but close to 2 percent.

But Lagarde said it was “too early and premature” to discuss scaling up the acquisition of the bond.

The ECB has raised its forecast for euro area economic growth this year from 4 per cent to 4.6 per cent and for next year from 4.1 per cent to 4.7 per cent, maintaining its 2023 forecast unchanged at 2.1 percent. It is fair to say that the risks to growth have been weighed to the negative point in the short term to describe them as “balanced”.

It also raised its forecast for the harmonized index of consumer prices in the euro area this year from 1.5 percent to 1.9 percent, in line with its target. But he said HICP would fall to 1.5 per cent next year and to 1.4 per cent in 2023 as rising energy prices fade. Excluding more volatile energy and food prices, core inflation is projected to increase from 1.1 percent this year to 1.4 percent in 2023.

Some of the ECB’s more conservative falcons have called for a slowdown in the acquisition of bonds. After that he kicked off a sale in the bond markets a month ago, a number of board members said pushed back against this idea, calming investors ’nerves and bringing down the costs of borrowing for eurozone governments.

“It’s a victory for the ECB’s pigeons,” said Krishna Guha, vice president of Evercore ISI. “We think the board was inclined to slow the PEPP in June at the beginning of the interim period, but it got cold feet after the market shifted to push sharply higher nominal yields with peripheral spreads, the euro and expectations of rising taxes are moving too far for comfort. ”

Having twice doubled the size of the PEPP last year, the ECB has just over € 700 billion of the € 1.85 billion overall to spend on its flagship crisis-fighting policy, which should will last until the March 2022 low.

“Central banks are happy to be behind the curve right now,” said Henrietta Pacquement, European credit portfolio manager at Wells Fargo Asset Management. “Manufacturing in Europe is doing better and services are expected to improve, but I think the ECB will want to see more evidence of recovery before acting.”

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