In a speech titled Monetary and Macroprudential Policy Interactions, ECB chief economist Peter Praet said that the central bank’s monetary policy has been “effective in stabilising the euro area economy and creating conditions for a sustained adjustment of inflation towards below, but close to, 2% over the medium term.” But for now, “patient, prudent and persistent monetary policy is still needed” for the Eurozone right now.” And, at the same time and in particular at this stage of the monetary policy cycle, “the risk channel of our policy has to be closely monitored”.

Praet also explained that monetary policy enhances financial stability by “smoothing business cycles and keeping inflation expectations anchored”. Also, it provides “liquidity to solvent institutions in stressful situations.” However, as monetary policy operates amid uncertainty, “miscalibration is a possibility”. And Financial stability risks “mostly arise when the chosen policy interacts with distorted incentives in the financial sector” that “that lead to excessive leverage and maturity transformation, and funding fragilities”.

Full presentation here.

Bundesbank President and ECB Governing Council member, Joachim Nagel expects a 25 bps increase for the upcoming July meeting of ECB. As for the meeting in September, Nagel stated on Monday, “we will see what the data will tell us.”

Unlike previous financial cycles, core inflation rates in developed nations are not declining as swiftly, implying a more drawn-out recovery process. Despite this, Nagel dismissed the notion of an over-tightened policy risking a hard landing for Europe as interest rates rise. “It’s too early to really declare a certain kind of victory when it comes to our inflation fight,” Nagel remarked.

Notably, the Bundesbank chief advised patience in the face of these challenges, acknowledging a potentially slower pace in transmission of monetary policy. “This time maybe we have to be a little bit more patient. The pace of the transmission channel is maybe not as fast as it was in the past,” he added.

ECB left monetary policy unchanged as widely expected. Main refinancing rate is held at 0.00%. Marginally lending and deposit rates are held at 0.25% and -0.50% respectively.

Forward guidance was unchanged that key ECB interest rates will remain at 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.”

Full statement below.

Monetary Policy Decisions

At today’s meeting the Governing Council of the European Central Bank (ECB) decided that 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. 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.

As decided at the last Governing Council meeting in September, net purchases will be restarted under the Governing Council’s asset purchase programme (APP) at a monthly pace of €20 billion as from 1 November. The Governing Council expects them 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 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.

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

ECB rate decision and press conference are two major focuses in a busy day. UK GDP and productions, US CPI and FOMC minutes will also be featured. ECB will keep monetary policies unchanged, without a doubt. There shouldn’t be any change in ECB’s plan on forward guidance too. That is, it will indicate to keep interest rates unchanged at least through the end of 2019. Details regarding the TLTRO III should be released later in June, rather than at this meeting.

Though, markets might be eager to know more on two topics. Firstly, March meeting minutes revealed that some members indeed favored to extend forward guidance until first quarter of 2020. President Mario Draghi would be asked to elaborate more on the discussions. Secondly, members’ comments over the past weeks have given rise to the possibility of a move to a “tiered deposit rate” system in order to save bank profitability.

Here are some previews:

• ECB to Hold Policy Steady at April Meeting as Euro Edges Up
• ECB Preview – More Warning on Downside Risk, No Big Move Until June
• ECB Preview: No New Policy Actions Expected As ‘Inflation I Delayed, Not Derailed’

In a speech, ECB Executive Board member Isabel Schnabel said, “to avoid that low inflation becomes entrenched in expectations and activity, we have changed our definition of price stability to a clear and symmetric 2% target in the medium term.”

Also, with policy rates close to the “lower bound”, “we intend to react especially forcefully or persistently to disinflationary shocks.” The may imply a “transitory period” with inflation moderately above target.

Full speech here.