The European Central Bank’s move to become more tolerant of inflation before raising interest rates has sparked immediate criticism from some of its more hawkish policymakers in an early indication of the divisions that will fuel its debate on when to scale back bond-buying.
After its latest policy-setting meeting on Thursday the ECB said it would keep buying bonds and maintain its deeply negative interest rates in an attempt to shift the eurozone economy out of its persistent pattern of sluggish inflation, and was prepared to tolerate a moderate and transitory overshoot of its price growth target.
But the wording of its new stance drew criticism from the leaders of the German and Belgian central banks, who both sit on its 25-person governing council, according to people familiar with the discussions.
During the policy debate, Jens Weidmann, president of Germany’s Bundesbank, complained that the new conditions set by the ECB were too aggressive and increased the risk of inflation surging above its target.
In addition, Klaas Knot, head of the Dutch central bank, called for the ECB to separate the timing of when it will stop buying bonds from its new rate guidance, those familiar with the discussions said. Another council member said this idea was dropped after policymakers decided to postpone a discussion of the asset purchase plans until the autumn.
Speaking in a press conference after the meeting, Christine Lagarde, ECB president, said there had been “minor divergence” on the guidance but it had still won the support of “an overwhelming majority”.
Some ECB rate-setters have called for a reduction of its €1.85tn programme of pandemic-related bond purchases, but the central bank left its guidance on asset purchases unchanged and Lagarde said it was “totally premature” to discuss tapering them.
In its announcement of the policy decision, the ECB said its revised guidance would “underline its commitment to maintain a persistently accommodative monetary policy stance to meet its inflation target”.
The German and Dutch central banks declined to comment and the Belgian central bank could not be reached.
Investors said the new guidance, published two weeks after the ECB unveiled a new strategy which increased its official inflation target to 2 per cent, made it more likely to keep its ultra-loose policy in place for longer.
Martin Wolburg, senior economist at Generali Investments, said the ECB’s shift meant “there is now leeway for it to push the first rate rise beyond 2024,” which would be a decade after it first cut rates below zero.
Eurozone government bond yields fell slightly following the announcement, before retrenching. Germany’s 10-year yield was 0.04 percentage points lower at minus 0.43 per cent, while Italy’s 10-year yield fell by a similar amount to 0.64 per cent. Bond yields fall as their prices rise. The euro dipped against the US dollar, hitting a three-month low of $1.1762.
Elga Bartsch, head of macro research at the BlackRock Investment Institute, said the ECB delivered “a dovish surprise” that was likely to be followed by “an upward adjustment” of its asset purchase plans later this year.
Lagarde said there was still “some way to go before the fallout from the pandemic on inflation is eliminated”, suggesting the ECB was unlikely to taper its bond-buying soon. But she denied the new wording implied low rates for longer, saying it would help to hit its target.
The medium-term outlook for eurozone inflation was “subdued” despite expectations for “strong growth” in the third quarter, she said, adding that the spread of the Delta coronavirus variant was “a growing source of uncertainty”.
The ECB said it was prepared to tolerate a moderate and transitory overshoot of its inflation target as it believed that a “persistent” policy was necessary when rates were close to the lowest point at which cuts are effective — as they are now.
The central bank committed not to raise its minus 0.5 per cent deposit rate until inflation hits its new 2 per cent target “well ahead of the end of its projection horizon and durably for the rest of the projection horizon”.
The ECB added: “This may also imply a transitory period in which inflation is moderately above target.”
Although inflation has risen to hit 1.9 per cent in June, most investors remain sceptical about the likelihood that the bank will meet its new goal.
“This was a bit like old wine in a new bottle; the communication has changed somewhat but in terms of substance the ECB remains very dovish, putting a cap on any tapering speculations,” said Carsten Brzeski, head of macro research at ING.
Some of the world’s other major central banks, such as Canada and Australia, have decided to slow the pace of their Covid-related stimulus programmes. Others such as the US Federal Reserve are still debating when to wind it down.
Additional reporting by Tommy Stubbington in London