— Bank dramatically lifts inflation forecast
LONDON (MaceNews) — The European Central Bank confirmed its emergency Covid stimulus package will conclude at the end of March, announcing an expansion of its regular quantitative easing program to begin in the second quarter, after its latest policy meeting on Thursday,
The Bank also presented a marked upgrade to its inflation forecasts. HICP is expected to rise by 2.6% this year, up from the September estimate of 2.2%, well above the ECB’s 2% target. Inflation will accelerate to 3.2% in 2022, up from the previous forecast of 1.7%, before settling at 1.8% in both 2023 and 2024. However, ECB President Christine Lagarde conceded in a post-meeting press conference that “there is possibly an upside risk” to inflation forecasts in the latter two years.
Lagarde and other ECB governing council members had previously justified the decision to keep rates at record-low levels, despite intensifying price pressures in the eurozone, by insisting that inflation was expected to return to target over the medium term. HICP surged to an annual rate of 4.9% in November, the highest level since the birth of the euro in 1999.
Despite soaring prices, Lagarde reiterated the message that the current level of rates remains appropriate. “It’s very unlikely” that rates will rise in 2022, she told reporters.
That leaves the ECB out of synch with other major central banks. The Bank of England lifted its benchmark rate by 15 basis points to 0.25% earlier on Thursday, while the Federal Reserve announced an accelerated wind down of its quantitative easing program on Wednesday. Lagarde rejected suggestions that the ECB may be behind the curve in delaying policy normalisation, noting that the UK and US economies entered the pandemic at a different stage of the business cycle and were both lifted by generous fiscal policy.
The ECB will double its Asset Purchase Program, which predates the PEPP, to €40 billion per month through the second quarter of 2022, falling to €30 billion in the third quarter and €20 billion in the final three months of next year.
Lagarde declined to be drawn on whether the bank would continue to buy Greek bonds once the PEPP ends; Greek government debt is rated below investment grade, which disqualifies the securities from the APP. However, she saw “no need alter the APP in any shape or form.”
However, the governing council extended the period for reinvestment of PEPP proceeds for a year until the end of 2024. Those reinvestments may be allocated to Greek bonds, according to the ECB’s policy statement, which rarely makes mention of specific nations. That commitment was “very strongly supported by the council,” Lagarde said.
There appeared to be less agreement over the array of measures announced on Thursday, with Lagarde admitting that “a few members did not agree” with all elements presented. But “there was broad majority” support for the “overall package,” she told reporters.
Thursday marked the final meeting for Bundesbank President Jens Weidmann, considered one of the most hawkish members of the council. The new German government has yet to name his replacement.
The ECB also downgraded its growth forecast for next year, to 4.2% from the September prediction of 4.6%. “Growth has moderated over Q4 and that is likely to extend into the early part of next year,” said Lagarde.