In today’s monetary policy announcement, the ECB has announced nothing new that markets did not either already know, or had expected.

Here are the highlights:

  • All interest rates held steady, including the deposit rate at -0.5%  – as expected  
  • PEPP asset purchases (emergency QE) to continue to be conducted at a significantly higher pace over the current quarter than the first months of the year. The total envelope remains at €1850bn and will run at least until the end of March 2022, or when the pandemic has finished  – as expected  
  • APP asset purchases (existing QE programme) to continue at €20bn per month  – as expected 
  • TLTRO III (liquidity financing for banks) continues – as expected  

After the strategy review was concluded the key question was how inflation would be treated moving forward. Here is a summary of the new guidance:

  • The inflation target is 2%
  • Interest rates will be at present or lower until inflation is 2% “durably” for the rest of the projection horizon.
  • May imply a “transitory period” with inflation moderately above target.

Here is the relevant paragraph from the statement:

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The ECB remains “persistently accommodative” and given that inflation is not even expected to hit 2% this year, before moderating back towards 1.4%/1.5% (according to the latest ECB projections), we can expect the ECB to remain ultra-loose on monetary policy for many years to come.

This is a dovish underlining of monetary policy. 

Initial Market Reaction

Euro has been choppy but is beginning to weaken. Bund yields spiked initially higher and are now slightly lower. European equities are trading slightly higher on the back of this.

  • EUR/USD around -20 pips lower 
  • 10 year Bund yield around -1bps
  • DAX around +20 ticks