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European Central Bank holds interest rates but tweaks guidance

European Central Bank President Christine Lagarde addresses European lawmakers during a plenary session at the European Parliament in Brussels, on February 8, 2021.

Olivier Matthys | AFP | Getty Images

The European Central Bank on Thursday held monetary policy steady, but tweaked its guidance to reflect its recently-hiked inflation target.

The ECB has committed to purchasing 1.85 trillion euros ($2.2 trillion) of bonds until March 2022 as part of its Pandemic Emergency Purchase Program (PEPP), and policymakers voted to keep this stimulus on the table for the time being.

Interest rates were also left unchanged, with the rate on the main deposit facility remaining at -0.5%, the benchmark refinancing rate at 0% and the marginal lending facility at 0.25%.

However, the euro zone central bank’s Governing Council revised its forward guidance on interest rates, having upgraded its inflation target to a symmetric 2% over the medium term at its recent strategy review.

The ECB said in a statement that it expects 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,” it added.

The dovish tilt effectively ties inflation to interest rates and was seen as a promise to be more accommodative for a longer period of time.

The euro quickly spiked to 1.1804 against the dollar on the news, but then trimmed those gains to trade back to levels near 1.1791.

Upon announcing the outcomes of its strategy review two weeks ago, the central bank vowed “especially forceful or persistent” policy support to navigate long periods of low inflation.

The latest ECB forecasts point to a headline inflation of 1.9% at the end of 2021, followed by a decrease to 1.5% and 1.4% in 2022 and 2023, respectively.

This is a breaking news story, please check back later for more.

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