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ECB must keep money to face future Eurozone inflation

EUdebates Team by EUdebates Team
09/02/2021
in Economy
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Lagarde said that inflation remained low despite an increase in January due to weak demand and a slump in the job market and product market. Inflation is expected to rise in coming months. Weak demand and the euro’s appreciation will dampen price pressure.

“Underlying price pressures are likely to remain subdued owing to weak demand, low wage pressures and the appreciation of the euro exchange rate,” ECB President Christine Lagarde told the European Parliament. “Our pledge to preserve favourable financing conditions is crucial in the current environment.”

The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.

HICP inflation remained unchanged

Euro area annual HICP inflation remained unchanged for the fourth month in a row, standing at -0.3% in December. Headline inflation is expected to move into positive territory in early 2021 owing to the end of the temporary VAT reduction in Germany, upward base effects in energy price inflation and the impact of recent oil price increases. However, underlying price pressures will remain subdued owing to weak demand, notably in the tourism and travel-related sectors, as well as to low wage pressures and the appreciation of the euro exchange rate.

Once the impact of the pandemic fades, a recovery in demand, supported by accommodative monetary and fiscal policies, will put upward pressure on inflation over the medium term. Survey-based measures and market-based indicators of longer-term inflation expectations remain at low levels, although market-based indicators of inflation expectations have increased slightly.

Why don’t we print money for Corona Crisis?

Christine Lagarde, President of the European Central Bank

ECB decided to reconfirm its very accommodative monetary policy stance

First, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively. The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.

Pandemic Emergency Purchase Programme (PEPP)

Second, the Governing Council will continue the purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,850 billion. The Governing Council will conduct net asset purchases under the PEPP until at least the end of March 2022 and, in any case, until it judges that the coronavirus crisis phase is over. The purchases under the PEPP will be conducted to preserve favourable financing conditions over the pandemic period. If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation.

The Governing Council will continue to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2023. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.

Asset Purchase Programme (APP)

Third, net purchases under the asset purchase programme (APP) will continue at a monthly pace of €20 billion. The Governing Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.

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