On Thursday, July 22 the European Central Bank held its monthly monetary policy meeting. It had to decide how to proceed with interest rates and asset purchases, as well as to set its forward guidance for the next few months.
The ECB is currently walking a very tight line, trying to balance steady (but particularly fast-paced) economic growth in the European Union and the risks associated with the rising coronavirus infections around the globe and the threat that the delta variant poses to the EU, as the bloc remains far from herd immunity still.
It seems that for now, Covid-19 is winning over the recovery in the EU. President Lagarde announced that the European Central Bank will stay committed to low interest rates for quite some time yet. The bank hopes to see inflation reach 2% and stay consistently at or above that level for some time before the regulator needs to start thinking about rate hikes.
According to the last information, the ECB is hoping to see inflation reach the coveted 2% level sometime next year, if not before then. Thus, there are no rate hikes on the horizon.
Furthermore, the central bank confirmed that it will not decrease its rate of asset purchases until the inflation target is very close in sight. The current PEPP is set to last until March 2022, but it will likely be replaced by a new asset purchases program afterwards if the coronavirus pandemic is not definitively over by then.
In other words, this policy meeting was very predictable, yet somehow the ECB’s promise of continued support for the economy managed to strengthen the euro a bit, even amid the risk aversion market sentiments.
