The European Central Bank is to continue its recent accelerated pace of sovereign bond buying and will keep lending rates on hold as it seeks to stabilise the recovery and until it sees a sustained rise in inflation.
ECB president Christine Lagarde said the aim was to keep a “steady hand” on the tiller as she expressed “moderate optimism” about future growth.
As vaccination kicks into gear and countries reopen after lockdown, the ECB said there may be a temporary spike in inflation.
The ECB will hold its main borrowing and lending rates down until the 2pc inflation target is “consistently reflected in underlying inflation dynamics”, Ms Lagarde said.
“We are far away from our ultimate aim of close to but below 2pc,” Ms Lagarde told reporters yesterday after the bank’s latest rate-setting meeting.
“We are not there. We certainly are not where we would like to be once the pandemic is over, but we are seeing some movement there and we will continue to monitor that carefully.”
While there was unanimous approval of the bank’s decision to keep its rates on hold, not all 25 rate setters at the meeting were keen on boosting bond buying under the ECB’s €1.8tn pandemic emergency purchase programme (PEPP), which will be in place until at least next March.
Ms Lagarde said that purchases over the next three months would “continue at a significantly higher pace than in the first months of the year”.
She also batted away questions about any slowing down in the pace of purchases or an exit from the PEPP.
“It will come in due course, but certainly for the moment it’s too early and premature. As simple as that.”
ECB staff believe the euro area economy will grow by 4.6pc this year and 4.7pc next year – an upward revision from March –– and 2.1pc in 2023.
They also predict annual inflation will rise to 1.9pc this year before falling back to 1.5pc in 2022 – again, an upward revision on the March forecast – and 1.4pc in 2023.
However, underlying inflation – excluding energy and food prices – will hit 1.1pc this year before rising slightly to 1.3pc next year and 1.4pc in 2023, another upward revision on March.
The rise in inflation is largely due to energy price rises and the end of a German VAT exemption, rather than any permanent pressure on prices.
While supply “bottlenecks” may cause prices to rise further in the second half of this year, Ms Lagarde said there was “no reason to believe that it is going to last through”.
Data released as the ECB met showed that US inflation accelerated to 5pc in May, well above expectations and the highest it has been since the start of the last financial crisis.
Some economists fear the US is in for a bout of persistently high inflation as a result of President Joe Biden’s $1.8tn stimulus plan, and that it could spill over into Europe.
But Ms Lagarde said that while there may be “some spillovers”, the US and eurozone economies would not react in the same way to the recovery.
“I think that the US economy situation and the euro area economy situation, it’s a very, very different story,” she said.
The US is growing far more rapidly than the eurozone.