What changed in the European Central Bank statement — 22 July 2021

European Central Bank held policy at -0.50%. The ECB’s July statement delivers a dovish shift by revising forward guidance to allow inflation to overshoot its target, signalling a more persistent accommodative stance. The next decision likely to maintain easy policy, with rate hikes deferred well into the future.

Decision

Decision: hold
Deposit facility rate: -0.50%

Going into the decision

On the day, the committee read as dovish — -2.0 on a scale where +3 means every member wants higher rates and −3 means every member wants cuts.

Reconstructed from official member remarks published before the decision date. 5 of 27 active members had stored official remarks.

What changed

The ECB’s July statement delivers a dovish shift by revising forward guidance to allow inflation to overshoot its target, signalling a more persistent accommodative stance. The next decision likely to maintain easy policy, with rate hikes deferred well into the future.

Inflation — More dovish. Inflation assessment added: 'medium-term outlook for inflation is still well below the target,' reinforcing dovish stance.
Labour Market — Little changed. No labour market references in either document; no shift.
Rate Path — More dovish. Forward guidance revised to require inflation reaching 2% well ahead of projection horizon, accepting overshoot—a more accommodative commitment than prior guidance that aimed for inflation just below 2%.
Balance Sheet — Little changed. PEPP purchase pace and envelope flexibility language unchanged; no directional shift.

Previous wording

The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.
rate path: Allows for rates to be cut further; conditions for lift-off are stringent, signalling prolonged accommodation.

Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council expects net purchases under the PEPP over the coming quarter to continue to be conducted at a significantly higher pace than during the first months of the year.
rate path: Maintains elevated PEPP pace, reinforcing accommodative stance.

If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation.
rate path: Highlights flexibility; PEPP envelope may not be fully used but can be increased if needed.

Net purchases under the asset purchase programme (APP) will continue at a monthly pace of €20 billion.
rate path: APP unchanged; no taper signal.

The Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry.
rate path: Reiterates option to ease or tighten as needed; no directional bias.

Current wording

In these conditions, the Governing Council today revised its forward guidance on interest rates. It did so to underline its commitment to maintain a persistently accommodative monetary policy stance to meet its inflation target.
rate path: Explicit commitment to persistent accommodation via forward guidance revision.

the Governing Council expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term. This may also imply a transitory period in which inflation is moderately above target.
rate path: New guidance lowers the bar for rate hikes; inflation must be sustainably at 2% well before forecast horizon ends, accepting overshoot.

the Governing Council continues to expect purchases under the PEPP over the current quarter to be conducted at a significantly higher pace than during the first months of the year.
rate path: Sustains elevated PEPP purchases, reinforcing dovish stance.

If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation.
rate path: PEPP flexibility allows adjustment either way, but emphasis on maintaining favourable conditions.

the medium-term outlook for inflation is still well below the Governing Council’s target.
inflation: Confirms inflation remains weak, supporting accommodative policy.

Official statement

Monetary policy decisions

22 July 2021

In its recent strategy review, the Governing Council agreed a symmetric inflation target of two per cent over the medium term. The key ECB interest rates have been close to their lower bound for some time and the medium-term outlook for inflation is still well below the Governing Council’s target. In these conditions, the Governing Council today revised its forward guidance on interest rates. It did so to underline its commitment to maintain a persistently accommodative monetary policy stance to meet its inflation target.

In support of its symmetric two per cent inflation target and in line with its monetary policy strategy, the Governing Council expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term. This may also imply a transitory period in which inflation is moderately above target.

Having confirmed its June assessment of financing conditions and the inflation outlook, the Governing Council continues to expect purchases under the pandemic emergency purchase programme (PEPP) over the current quarter to be conducted at a significantly higher pace than during the first months of the year.

The Governing Council also confirmed its other measures to support its price stability mandate, namely the level of the key ECB interest rates, its purchases under the asset purchase programme (APP), its reinvestment policies and its longer-term refinancing operations. Specifically:

Key ECB interest rates

The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively.

Asset purchase programme (APP)

Net purchases under the APP will continue at a monthly pace of €20 billion. The Governing Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.

The Governing Council also intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

Pandemic emergency purchase programme (PEPP)

The Governing Council will continue to conduct net asset purchases under the PEPP with a total envelope of €1,850 billion until at least the end of March 2022 and, in any case, until it judges that the coronavirus crisis phase is over.

As the incoming information confirmed the joint assessment of financing conditions and the inflation outlook carried out at the June monetary policy meeting, the Governing Council continues to expect purchases under the PEPP over the current quarter to be conducted at a significantly higher pace than during the first months of the year.

The Governing Council will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation. In addition, the flexibility of purchases over time, across asset classes and among jurisdictions will continue to support the smooth transmission of monetary policy. If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation.

The Governing Council will continue to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2023. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.

Refinancing operations

The Governing Council will continue to provide ample liquidity through its refinancing operations. In particular, the third series of targeted longer-term refinancing operations (TLTRO III) remains an attractive source of funding for banks, supporting bank lending to firms and households.

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The Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at its two per cent target over the medium term.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.

Background reading

Cadence's comparison is generated from the official documents. Read the methodology.