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ECB holds eurozone interest rate at 0%

·Senior City Correspondent, Yahoo Finance UK
·4-min read
European Central Bank president Christine Lagarde. Photo: Horacio Villalobos/Corbis/Getty Images
European Central Bank president Christine Lagarde. Photo: Horacio Villalobos/Corbis/Getty Images

The European Central Bank's (ECB) governing council said on Thursday it would hold the eurozone's interest rates unchanged and keep its roster of unconventional monetary policy tools at the current calibrations, despite rising inflation across the bloc and an improving economic outlook.

The ECB held the headline eurozone interest rate at 0% and kept its deposit rate for banks at -0.5%. The pandemic emergency purchase programme (PEPP) was maintained at €1.85tn (£1.60tn, $2.26tn) and the asset purchase programme was held at €20bn.

"Steady as she goes seems to be the key message from today’s session in Frankfurt," said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics. 

The euro was little changed against the dollar (EURUSD=X) and pound (GBPEUR=X) in the wake of the statement.

Economists said ahead of the meeting that no changes were expected, despite rising inflation across the eurozone. Inflation rose sharply to 2% in May, meeting the ECB's target but raising fears that prices rises could soon run above acceptable levels.

Read more: ECB upgrades forecasts for Europe's economy

Rising inflation has led to speculation about when and how the ECB will begin to slow asset purchases under PEPP, which was set up last year to keep finance flowing easily and cheaply to the real economy as the COVID-19 pandemic struck. Market commentary ahead of Thursday's meeting was dominated by so-called "taper talk" – speculation as to whether the ECB would raise the prospect to tailing off the programme.

The governing council firmly rejected this position and said it would continue with PEPP until "at least March 2022 and, in any case, until it judges that the coronavirus crisis phase is over". The council said it would continue to buy up assets at "a significantly higher pace than during the first months of the year".

Vistesen and colleague Mel Debono at Pantheon said they expected the ECB to make purchases worth €20bn a week until at least the end of September, although they said the number "isn’t set in stone".

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Read more: European markets tread water as ECB decides on interest rates 

Rising prices could also push the central bank to hike interest rates. The governing council said on Thursday that interest rates would not be adjusted until "underlying inflation dynamics" point to a consistent level at or near 2%.

ECB president Christine Lagarde and her colleagues believe rising inflation in the eurozone is being driven by temporary effects, such as comparison to a period last year when energy prices crashed due to an oil glut which magnifies the true scale of underlying inflation.

Macroeconomists at the ECB upgraded their forecasts for inflation this year and next but price rises are expected to remain below the central bank's 2% target by the end of the 3 year forecasting horizon. Lagarde said inflation was expected to continue rising for the remainder of this year before falling in early 2022.

Economists expect the ECB to begin slowing PEPP purchases – or tapering – later this year, before winding the programme down early in 2022. Silvia Ardagna and Francois Cabau, economists at Barclays, said in a note last week that the ECB was unlikely to slow PEPP now "given still highly uncertain economic outlook and no meaningful change to a subdued medium-term inflation outlook". 

"In our view, even a slight reduction of the pace of purchases could be interpreted by the market as tapering and jeopardise the result of the recent more dovish communication on easing financing conditions," the pair wrote.

At a press conference following the policy announcement, Lagarde said the economic outlook for the eurozone had improved since the ECB's last policy update in April. Surveys were pointing to a "vigorous bounce back" for the service sector and manufacturing activity was also surging.

Even still, Lagarde said risks remained "balanced" and "uncertainties remain". The governing council concluded that an "ample degree of economic accommodation" was still necessary to support the recovery.

Watch: Will interest rates stay low forever?

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