The European Central Bank keeps bond-buying steady and says it will tolerate inflation above 2% for the first time

Christine Lagarde, President of the European Central Bank, speaks to the media following a meeting of the ECB governing board
Christine Lagarde is President of the European Central Bank.

  • The European Central Bank kept its $2.2 trillion bond-buying package unchanged and interest rates unchanged.
  • It revised its forward guidance, saying for the first time it would tolerate inflation rising over 2%.
  • Central banks around the world are grappling with rising inflation as economies reopen from the pandemic.
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The European Central Bank kept its $2.2 trillion bond-buying package steady and interest rates at record lows on Thursday, but struck a more relaxed tone on price rises, saying for the first time that it would tolerate a period where inflation is above its 2% target.

The ECB’s governing council said its 1.85 trillion euro ($2.2 trillion) coronavirus bond purchase programme would continue at a faster pace than at the start of the year, in an effort to keep market interest rates low as the eurozone economy recovers from the pandemic.

And it said its key deposit rate would stay at the record-low level of -0.5%, while the central bank’s other rates would also remain unchanged.

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But the ECB struck a more dovish tone when it came to its so-called forward guidance on interest rates. To be dovish is to be in favor of loose monetary policy.

The central bank said it expects rates to stay at rock-bottom “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.”

It also said it wanted to see that “realized progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilizing at two per cent over the medium term.” The bank added: “This may also imply a transitory period in which inflation is moderately above target.”

The euro fell after the decision was released, and was 0.2% lower against the dollar at $1.777. The continent-wide Stoxx 600 stock index was up 0.87%.