There were 4 key monetary policy decisions made today at the ECB’s Monetary Policy Meeting. It was speculated that the ECB would consider cutting interest rates in order to combat the deflation that was seen in August, but the decision has been made to hold rates for now, therefore confirming their accommodative monetary policy.
The interest rates on the main financing operations, the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively, which shows the ECB still has faith in the economy bouncing back from August’s poor inflation rate which came out at -0.2%. The negative inflation rate tells us that low demand in most industries are forcing European factories to cut prices in order to remain competitive in their respective industries. It is clear the ECB are looking to keep the key interest rates at their present or lower levels until the inflation rate converges sufficiently close to the projected level of 2%.
Quantitative easing will continue under the pandemic emergency purchase programme (PEPP) with a total of 1,350 billion euros. This has been put into place to offset the downward impact of the pandemic and to move towards the projected path of inflation. The Governing Council will conduct net asset purchases under the PEPP until at least the end of June 2021 in order to support the economic recovery.
Net purchases under the asset purchase programme (APP) will continue at a monthly pace of 20 billion euros, together with the purchases under the additional 120 billion euro temporary envelope available until the end of the year. It is expected that monthly net asset purchases under the APP will continue as long as it’s necessary to reinforce the accommodative impact of their policy rates, and to end shortly before the ECB decides to raise their key interest rates.
The Governing Council will continue to provide ample liquidity through its refinancing operations in order to support bank lending to firms and households. Overall, the ECB have chosen to keep their current monetary policy in order to stimulate economic growth as lower interest rates can encourage borrowing and investing which can subsequently push the inflation rate to their desired target.
With the ECB president, Lagarde, playing down the worries about deflation, we’ve seen EURUSD push to 1.90 for the first time in over a week and is moving towards the two year high of 1.20 which was achieved on September 1st.
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