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ECB pledges record low rates to reach 2% inflation

© Reuters. FILE PHOTO: The headquarters of the European Central Bank (ECB) in Frankfurt, Germany, March 12, 2016. REUTERS/Kai Pfaffenbach//File Photo

The European Central Bank pledged on Thursday to keep interest rates at record lows for even longer to help sluggish inflation in the euro zone rise back to its elusive 2% target.

ECB President Christine Lagarde told a news conference the bank was committed to “a persistently accommodative monetary policy stance to meet our inflation target”. She said however the change in language was not backed by all ECB policymakers.

The euro initially edged lower but by 1345 GMT, it was up 0.25% while euro zone bond yields fell, with Italian 10-year borrowing costs hitting three-month lows.

HIGHLIGHTS-Lagarde comments at ECB press conference

For a text of the ECB statement:

COMMENTARY:

HOLGER SCHMIEDLING, CHIEF ECONOMIST, BERENBERG

“As Lagarde explained in the press conference, the ECB Council will use “judgement” to assess if and when the conditions for a rate hike are met at some time in the future. The changes in the wording of the statement do not constrain such judgement calls for either the doves or the hawks. No revolution in Frankfurt. For a central bank, that is actually re-assuring.

“The ECB currently projects 1.4% inflation for 2023 and seems to expect only modest upward pressures on inflation on trend. Taken at face value, the statement suggests that the ECB may only raise rates in 2025 if the ECB were then to project a rise of inflation to at least 2% by mid-2027.”

STEPHEN GALLO, STRATEGIST, BMO CAPITAL MARKETS

“The reaction in the bond market: ‘the new guidance might generate faster inflation……but it also might not.’

“The commitment to burning through the remaining capacity in the PEPP at a fairly quick pace may also explain the initial selloff in core rates, but when you unpack that logic, you’re still left with the ECB buying more for longer, and that could lead one to believe that, when the APP is eventually boosted to supplant the PEPP, the boost might be meaningful.”

ELGA BARTSCH, HEAD OF MACRO RESEARCH, BLACKROCK INVESTMENT INSTITUTE

“Today’s dovish move, which will likely be followed by an upward adjustment in QE later this year, was enabled by the ECB’s new strategy framework unveiled on July 12. It has been made possible because, contrary to the strategy framework itself, which was agreed unanimously, the policy decisions themselves do not need to be taken by consensus.

“So even though hawks on the Governing Council may have prevented the ECB adopting any form of average inflation targeting in the strategy review, doves can potentially now shift policy in the direction of some deliberate toleration of inflation overshoots

“At the current juncture, monetary policy space in the Euro area is constrained by the effective lower bound and the ECB might struggle to re-anchor inflation expectations and to regain policy space without resorting to additional measures or getting more support from the fiscal policy side. In this context, the coming review of the European fiscal rules will be crucial. Otherwise Europe risks further eroding the monetary space it has.”

KONSTANTIN VEIT, PORTFOLIO MANAGER, PIMCO

“Similar to the Bank of Japan’s inflation overshooting commitment, the ECB’s reference to transitory overshoots probably won’t durably impress markets given the long history of missing the previous, more conservative definition of price stability.

“In September we believe the ECB will start to prepare for an end of PEPP and an upsize of the regular APP in 2022, to maintain easy financing conditions beyond the end of the pandemic emergency policy measures, a

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