No Surprises From ECB Which Vows To Take “Whatever Action Is Needed To Fulfill Mandate”

As expected, the ECB kept all of its rates unchanged, with the central bank noting that any adjustments to interest rates “will take place some time after the end of the Governing Council’s net purchases under the APP and will be gradual.” The ECB also said that “the path for the key ECB interest rates will continue to be determined by the Governing Council’s forward guidance and by its strategic commitment to stabilize inflation at 2% over the medium term” and that “the Governing Council expects the key ECB interest rates to remain at their present levels until it sees inflation reaching 2% 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 2% over the medium term.”

On QE, the ECB said that “incoming data since its last meeting reinforce its expectation that net asset purchases under its asset purchase programme should be concluded in the third quarter” and added that “looking ahead, the ECB’s monetary policy will depend on the incoming data and the Governing Council’s evolving assessment of the outlook.” The ECB then fell back to a trite Mario Draghi cliche, saying that

“in the current conditions of high uncertainty, the Governing Council will maintain optionality, gradualism and flexibility in the conduct of monetary policy. The Governing Council will take whatever action is needed to fulfil the ECB’s mandate to pursue price stability and to contribute to safeguarding financial stability.”

There was some new language however, with the ECB adding that “the Governing Council stands ready to adjust all of its instruments within its mandate, incorporating flexibility if warranted, to ensure that inflation stabilises at its 2% target over the medium term. The pandemic has shown that, under stressed conditions, flexibility in the design and conduct of asset purchases has helped to counter the impaired transmission of monetary policy and made the Governing Council’s efforts to achieve its goal more effective. Within the Governing Council’s mandate, under stressed conditions, flexibility will remain an element of monetary policy whenever threats to monetary policy transmission jeopardise the attainment of price stability.”

Here are some more details from the ECB statement on…

Rates:

• The Governing Council will assess the appropriate calibration of its two-tier system for reserve remuneration so that the negative interest rate policy does not limit banks’ intermediation capacity in an environment of ample excess liquidity.
• the Governing Council expects the key ECB interest rates to remain at their present levels until it sees inflation reaching 2% 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 2% over the medium term.

Asset Purchases:

• Monthly net purchases under the APP will amount to €40 billion in April, €30 billion in May and €20 billion in June.
• The Governing Council judged that the incoming data since its last meeting reinforce its expectation that net asset purchases under the APP should be concluded in the third quarter.
• The calibration of net purchases for the third quarter will be data-dependent and reflect the Governing Council’s evolving assessment of the outlook.
• “The Governing Council also 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.”

Inflation and Price Stability:

• The Governing Council will take whatever action is needed to fulfil the ECB’s mandate to pursue price stability and to contribute to safeguarding financial stability.

PEPP:

• The Governing Council intends to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2024.
• The future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.
• In the event of renewed market fragmentation related to the pandemic, PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions at any time. This could include purchasing bonds issued by the Hellenic Republic over and above rollovers of redemptions in order to avoid an interruption of purchases in that jurisdiction, which could impair the transmission of monetary policy to the Greek economy while it is still recovering from the fallout from the pandemic.
• Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic.

TLTRO/Refi operations:

• The Governing Council will continue to monitor bank funding conditions and ensure that the maturing of operations under the third series of targeted longer-term refinancing operations (TLTRO III) does not hamper the smooth transmission of its monetary policy.
• The Governing Council will also regularly assess how targeted lending operations are contributing to its monetary policy stance. As announced, it expects the special conditions applicable under TLTRO III to end in June this year.
• The Governing Council will also assess the appropriate calibration of its two-tier system for reserve remuneration so that the negative interest rate policy does not limit banks’ intermediation capacity in an environment of ample excess liquidity.

Here is a redline of the ECB statements:

In kneejerk response, the EURUSD tumbled about 40 pips although that appears to be mostly position squaring and flows as there were no actual surprises from the ECB.