The ECB left its powder dry in January. While continuing to warn of the downside risks on the Eurozone and global economy, the central bank delivered a hawkish tweak about operation of the Pandemic Emergency Purchase Program (PEPP). On the monetary policy measures, the central bank left the size of PEPP at 1850B euro and that of the Asset Purchase Program (APP) at 20B euro/ month. The deposit rate stayed at -0.5%. Meanwhile, the marginal lending rate and the deposit rate also remained unchanged at 0.00% and 0.25%, respectively.
On the economic outlook, ECB suggested that “the pandemic continues to pose serious risks to public health and to the euro area and global economies”. Domestically, GDP should have contracted in 4Q20 while the short-term outlook should still be negatively affected by the resurgence of the pandemic. Inflation remained “very low” amidst “weak demand” and “significant slack in labour and product markets”. The market was closely awaiting policymakers’ comments on euro’s strength. Little has been discussed in the statement, though. The members only pledged to “continue to monitor developments in the exchange rate with regard to their possible implications for the medium-term inflation outlook”.
On the monetary policy, the size of the asset purchases programs and policy rates all remained intact. The ECB reiterated the forward guidance that the policy rates would “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”. There is some hawkish tweak on the PEPP operation. For the first time, the central bank revealed that the size of 1850B euro is a ceiling, rather than a target. As noted in the statement, “if favorable 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”. Yet, it added that the envelope “can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation”. Other guidance is the same as the last month, with the ECB reaffirming that the PEPP buying will continue “until at least the end of March 2022 and, in any case, until it judges that the coronavirus crisis phase is over” and “the Governing Council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner”.