ECB to Change Policy Guidance in Upcoming Meeting

ECB to Change Policy Guidance in Upcoming Meeting

European Central Bank President Christine Lagarde advised investors that a change to policy guidance is likely to be announced at the upcoming meeting on July 22nd. The most anticipated policy updates pertain to monetary stimulus. 

The European Central Bank (ECB) president signalled that new measures could be introduced in 2022 to better assist the euro-area economy after the current emergency bond program ends. 

The announcement came shortly after the ECB raised its inflation target to 2%. “The Governing Council considers that price stability is best maintained by aiming for a 2% inflation target over the medium term. This target is symmetric, meaning negative and positive deviations of inflation from the target are equally undesirable,” the ECB said in a statement on July 8th

Prior to Lagarde’s announcement, the next ECB meeting was expected to be relatively uneventful. However, after the G20 Venice Conference on Climate, the president has now said to expect “some interesting variations and changes”. 

“Given the persistence that we need to demonstrate to deliver on our commitment, forward guidance will certainly be revisited,” Lagarde went on to say

The Euro-Zone Economy 

The ECB’s decision to review policy guidance earlier than expected is thought to be due to the euro-zone economy beginning to recover from the coronavirus pandemic. The review also took into account climate-change considerations, which will be introduced into the policy, along with the cost of owner-occupied housing. 

Lagarde also pointed out that she expects the ECB’s €1.85 trillion Pandemic Emergency Purchase Programme to run until March 2022 – the earliest possible end date. After that, it could “transition into a new format”. 

The ECB president dismissed the need to discuss the emergency stimulus, which is speculated to be coming to an end. Lagarde pointed out that the Delta variant continues to pose a threat to total economic recovery. “We need to be very flexible and not start creating the anticipation that the exit is in the next few weeks, months,” she said

Bank of France chief and Christine Lagarde’s Governing Council colleague, Francois Villeroy de Galhau, made a similar statement yesterday, adding that policy can be altered during any monetary meeting. “We have at least four such meetings between now and the end of the year,” he said

Global Central Banks 

The ECB’s approach to its stimulus program contrasts that of other central banks around the world. Officials of the US Federal Reserve have already begun discussing when to start tapering their stimulus program as economic growth and inflation accelerate. Also, many economists suggest that the Bank of England is likely to raise interest rates as early as next year. 

Instead, the immediate task of the ECB is to review part of its guidance on future interest rates and asset purchases that are tied to the previous inflation goal of below 2%. 

Lagarde spotlighted what she felt was the most important issue: “the acceptance and the tolerance” that a transitory inflation overshoot is needed in order to restore price stability. 

As of 10:26 am GMT today, the euro was down 0.2% at $1.1854

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