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The European Central Financial institution is slowing its bond purchases when inflation rises

Christine Lagarde (R), President of the European Central Bank (ECB), and Vice-President Luis de Guindos (L)

Thomas Lohnes | Getty Images News | Getty Images

LONDON – The European Central Bank left its monetary policy unchanged on Thursday but decided to slow the pace of net asset purchases as part of its pandemic emergency purchase program.

The Governing Council decided to keep the interest rate on the main refinancing operations of the ECB at 0%, on the marginal lending facility at 0.25% and on the deposit facility at -0.5%.

"Based on a joint assessment of funding conditions and the inflation outlook, the Governing Council believes that favorable funding conditions can be sustained with a moderately slower pace of net asset purchases under the (PEPP) than in the previous two quarters," the ECB said in a statement.

Markets had been eagerly awaiting the Frankfurt Institute's latest monetary policy decision for signs of impending weakening of pandemic-era stimulus amid rising inflation and strong economic growth.

In a press conference on Thursday, ECB President Christine Lagarde said the ruling was "a unanimous decision in all respects".

The euro gained 0.2% against the dollar after deciding to trade around $ 1.1837 while European stocks offset previous losses.

The ECB reiterated that interest rates will remain at their current or lower levels until inflation reaches 2% "well before the end of its projection horizon and persistently for the remainder of the projection horizon" and until the ECB believes that inflation is at Stabilize 2%.

"This can also mean a transition period in which inflation is moderately above target," added the ECB.

"The lady does not rejuvenate"

In Thursday's press conference, Lagarde paraphrased former British Prime Minister Margaret Thatcher to reassure the market that "the lady is not rejuvenating".

“We are re-calibrating, just like in December and March. We do this on the basis of the framework, which is a joint assessment, ”Lagarde told reporters.

"We looked at funding terms and concluded that they would remain cheap and we are doing so on the basis of the inflation outlook."

She reiterated that the Governing Council believes it can maintain favorable conditions with a “moderately slower buying pace”.

Seema Shah, chief strategist at Principal Global Investors, said Thursday's move was the first "meaningful step" towards a throttling for the ECB. The total purchase amount remains the same.

"Characteristically, it is not tied to a particular buying pace, but rather retains an element of flexibility that will be helpful in the face of a potential tightening of financial conditions as the Fed's cut approaches," said Shah.

As the market focus shifted last week from the time the Fed was throttling to a possible reduction in purchases by the ECB, Thursday's announcement came as no surprise, Shah said.

“With markets concerned about the risk of restrictive policy error, Lagarde's efforts to separate bond purchases from the rate hike will be important in reassuring investors that the central bank is not on the verge of repeating the 2011 monetary policy mistake. "She added.

Decade high

Inflation in the eurozone hit a decade high of 3% in August, and GDP in the 19-member currency bloc rose 2% in the second quarter, beating economists' expectations.

The central bank's pandemic emergency purchase program was launched in March 2020 to support the eurozone economy through the Covid-19 crisis and is expected to be in March 2022 with a potential total value of 1.85 trillion euros (2.19 trillion US dollars ) leak.

The ECB's policymakers have sounded contradicting the threat of persistent rather than “temporary” inflation, as has been the general consensus among central banks around the world.

The ECB on Thursday raised its longer-term inflation forecasts to 2.2% in 2021, 1.7% in 2022 and 1.5% in 2023 and 1.5% in 2023, respectively.

Some analysts have suggested that the ECB will announce the reduction of its Covid-induced stimulus package in December, with the US Federal Reserve signaling that it will likely begin the reduction by the end of the year.

ECB Chief Economist Philip Lane said in a recent interview that "September is very far" from the planned completion date of the PEPP, suggesting that a reduction in the announcement may still be a few months away.

The asset purchase program (APP) will continue at a monthly pace of 20 billion euros, confirmed the Governing Council. The central bank used this program in combination with PEPP to support the 19 member economy.

"The Governing Council of the ECB continues to assume that the monthly net asset purchases under the APP will run for as long as necessary to reinforce the accommodative effect of its policy rates and will end shortly before the start of the ECB policy rate hike," said it in the statement.

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