ECB Policy Decisions

The Governing Council, this Thursday announced that the three main rates will remain unchanged; Marginal Refinancing Operations, Marginal Lending facility and the Deposit Facility will stay at 0%,0.25% and -0.50% respectively. These rates are expected to stay at those levels until inflation comes close to 2%. Up until June 2021, the Council intends to continue to support the economy through the Pandemic Emergency Purchase Programme (PEPP) which amounts to a total of EUR 1,350 billion. Under the current Asset Purchase Programme (APP), the ECB continues to purchase EUR 20 Billion monthly and EUR 120 Billion monthly under another temporary envelope to further inject liquidity in the markets.

Later in the day, ECB president Christine Lagarde gave a summary of the union’s economic situation highlighting that momentum in the services sector has slowed. In addition to what the governing council mentioned, she also mentioned ample monetary stimulus through TLTRO 3 (the third in the series).

Lagarde Q3 outlook on the economy was fairly positive, revising annual real GDP growth in September to -8% in 2020, 5% in 2021 and 3.2% in 2020 from June’s projections of -8.7% in 2020, 5.2% in 2021 and 3.3% in 2022 thus showing reduced impact this year but further economic contraction in 2021 and 2022.

The president increased its 2021 inflation projection from 0.8% to 1%. She noted that negative inflation (which last reading came at -0.2%) will persist in the coming months due to oil prices, weak demand, EUR appreciation and low wage pressures.

Lagarde re-emphasized the importance of fiscal policies, now more than ever in fighting the sharp contraction in the economy. Journalists asked Lagarde’s opinion torwards the recent appreciation of the EUR to which she replied that the ECB does not target the exchange rate (A stance taken by previous ECB presidents). She also argued against possible deflation, as the recent metric (-0.2%) was due to a temporary German VAT decrease and weak consumption demand.

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