Because the ECB will be patient in raising rates

Because the ECB will be patient in raising rates

The comment by Luca Mezzomo, Head of Macroeconomic Analysis of Intesa Sanpaolo, on today's meeting of the ECB

The ECB has linked the forward guidance on official rates (or forward guidance) to the new target of 2%. Furthermore, the ECB has decided to use the far half of the forecast range as a reference to assess whether the target is met: the target must be achieved well before the end of the forecast horizon and therefore maintained for the rest of the period. ; moreover, it must be confirmed by the dynamics of underlying inflation. It should be noted, however, that the rule will not be applied mechanically: it remains a 'political' evaluation carried out by the board of directors. As President Lagarde has pointed out, the decision on forward guidance was made by an overwhelming majority, and not unanimously. The statement enters the warning that the ECB will be patient in reacting to the achievement of the objective, and that therefore inflation could temporarily and moderately exceed 2%. According to the president, however, this will be 'accidental' and not deliberate. There are no other changes to the monetary policy framework: all unchanged on the App and Pepp. The prospective indication on the App remains linked to that on rates, as before. The discussion on Pepp net purchases will take place in September based on the new staff forecasts. With the rise of the Delta variant in full development, it becomes more likely that a reduction will not be decided even on that occasion, although the ECB has been quite positive about the possibility of observing a limited economic impact. The new formulation of the forward guidance on official rates The ECB incorporated the new monetary policy objective in the press release, modifying the forward guidance accordingly. While many of the changes were obvious, there is some relevant news. President Lagarde said the decision was not unanimous, but an "overwhelming majority".

The new structure of forward-looking indications includes 3 fundamental elements, and a collateral one:

  • The inflation target is expressly formulated in a prospective, not a retrospective, form. The time frame for the assessment is set "well before the end of its forecast horizon",
  • However, the achievement of the target must be confirmed "for the remainder of the forecast horizon". This seems to indicate that the monetary policy shift will necessarily require inflation forecasts of 2% or more for at least the second and third years of the forecast scenario.
  • The criterion refers to the general price index, but continues to be complemented by an assessment of underlying inflation, which must record “progress […] sufficiently advanced to be consistent” with the stabilization of inflation at 2%.
  • In the press release there is a warning that “this may also imply a transitional period in which inflation is moderately above the target”. Therefore, the ECB signals that it will exercise some patience before raising official rates. The president specified that this phase of exceeding the objective will not be the result of a deliberate choice, but an 'accidental' fact, because all deviations from the objective remain unwelcome. I think that this passage can be interpreted by assuming that in the phase of exiting the phase of low inflation the ECB is willing to run a certain risk of finding itself temporarily behind in the correction of monetary policy, in a context of inflation forecasts close to the target if marginally higher than it. This approach should avoid the risk of an untimely hike like that of 2011.


The prospective indication on the App has remained unchanged. The hypothesis of uncoupling the condition on purchases from that on rates has therefore not passed. The text states that:

  • Net purchases will continue "for as long as it takes to reinforce the accommodative impact of its policy rates and to end shortly before benchmark interest rates begin to rise," and
  • the reinvestments of APP capital maturities will continue "for an extended period of time beyond the date on which the key ECB interest rates begin to raise, and in any case for the time necessary to maintain favorable liquidity conditions and a large degree of monetary accommodation ".

With regard to Pepp, on this occasion the ECB simply confirmed that net purchases will continue at a significantly higher rate than in the first months of the year, as expected; the deadline remains on March 31, 2022, or in any case "until the pandemic crisis is deemed to be over". The chairman said Pepp was not discussed in any respect, as were the TLTROs.


The forward guidance excludes the possibility of expectations of interventions on official rates in the coming months. Regarding the App, we can assume that net purchases will not change as long as the (more flexible) Pepp is operational. At the September meeting, the ECB will have to decide whether to confirm the current indications (which suggest to expect significantly higher purchases than at the beginning of the year), or whether to report a possible reduction, as some 'hawks' within the board of directors would like. Pending the outcome of the July Survey of Monetary Analysts (SMA), the aggregate results of the June one showed that analyst consensus leans towards the hypothesis that the ECB will reduce Pepp net purchases marginally in the fourth quarter of 2021, and more clearly in the first quarter of 2022. Similar indications came from other polls, such as those of Reuters and Bloomberg . Considering that Pepp aims to counter the effects of the pandemic on inflation prospects, we believe that the resumption of infections will shift the balance towards a scenario of confirmation of Pepp volumes in the 4th quarter of 2021, to postpone the decision on a possible reduction. The need to support the review of the strategy with a non-contradictory monetary policy framework will also push in the same direction: a squeeze on Pepp in September, if not supported by a clear improvement in the pandemic scenario, risks halting the normalization of inflation expectations. Overall, the spread of vaccinations seems to have further reduced the impacts of the waves of contagion, and therefore the need for an economic policy reaction. However, the rapid spread of the Delta variant has shown that the war is not yet fully won, and the level of uncertainty in September may even be higher than today.


The “patience” that the ECB has indicated it wants to demonstrate in the face of inflation moderately above 2% may imply a later take-off for official rates, all other things being equal.

The decline in implicit rates in 3-month Euribor futures starting from 8 July (-5bps on 2024, which widens to -8bps on 2025 and -11bps on 2026) seems to indicate that this aspect has already been incorporated into market expectations. . In practice, however, conditions may not be the same – if, for example, rising inflation were also assisted by shifts in expectations. The president rejected the argument that the new approach implies that monetary policy will remain accommodative longer. However, the current monetary policy stance has undoubtedly raised the bar to cross before starting the next rate hike cycle.

This is a machine translation from Italian language of a post published on Start Magazine at the URL on Thu, 22 Jul 2021 15:06:07 +0000.