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ECB promises even longer support for euro zone economy

·2 min read
FILE PHOTO: Headquarters of the European Central Bank (ECB) are illuminated with a giant euro sign at the start of the "Luminale, light and building" event in Frankfurt

FRANKFURT (Reuters) - The European Central Bank unveiled new policy guidance on Thursday that hints at even longer support for the bloc's struggling economy, in line with its recent commitment to boost inflation that has undershot the ECB's 2% target for nearly a decade.

Unveiling a new strategy and a tweaked inflation target just two weeks ago, the ECB said that long periods of low inflation would require "especially forceful or persistent" policy support, a hint that stimulus might be kept in place for longer than many had predicted.

The ECB said it expects rates to remain at their present or lower levels until it sees inflation reaching it 2% target "well ahead" of the end of its projection horizon and durably for the rest of the projection horizon.

It also said progress in raising underlying inflation should be "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," the ECB said in statement.

The bank earlier promised that interest rates would stay at their present or lower levels until the inflation outlook in its staff forecasts "robustly" converged to a level close to the target and underlying inflation dynamics were also showing such an upward trend.

Investors will now look for ECB President Christine Lagarde to unpack this guidance at her 1230 GMT news conference and explain the precise implications for interest rates and asset purchases.

But rate hike expectations have already been pushed out since the strategy update and markets see no increase in the bank's deposit rate until 2024, so Lagarde may seek to conserve those expectations rather than push them out further.

Investors will also look for clues on the future pace of asset buys after the ECB kept the main parameters of both the Pandemic Emergency Purchase Programme (PEPP) and the Asset Purchase Programme (APP) unchanged.

The 1.85 trillion euro PEPP is set to run least until next March with volumes in the third quarter significantly above levels at the start of the year. The APP will meanwhile run at 20 billion a month until just before the first rate hike.

(Reporting by Balazs Koranyi; Editing by Catherine Evans)