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Temporary factors driving rising eurozone prices are expected fade early next year, European Central Bank president Christine Lagarde said Thursday, noting that headline inflation will need to consistently hit 2% by the mid-point of the ECB's projection horizon before the Governing Council will consider raising rates.
Adjusting forward guidance to take into account its new symmetric inflation target, the ECB said it expects key rates to remain at present or lower levels until inflation reaches 2% well ahead of the end of its projection horizon and durably for the rest of the horizon period. It will also need to see that "realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term", it said, adding that "this may also imply a transitory period in which inflation is moderately above target."
As expected, July's Governing Council's decision was communicated in a shorter statement than previously seen, with fewer data points and using simplified language. Lagarde admitted that precise calibration of the new forward guidance was not agreed unanimously, but added that the number of dissenters was "very, very small." The ECB left its key policy settings unchanged.
BALANCED OUTLOOK DESPITE DELTA VARIANT
The economic outlook for Europe remains broadly balanced, she said, with the coronavirus's Delta variant creating additional uncertainty. The assumption in June's Eurosystem staff growth and inflation projections that some pandemic containment measures will persist into Q3 and Q4 this year continues to support the ECB's baseline scenario, she added.
Inflation pressures remain subdued, with "some way to go before the fallout from the pandemic on inflation is eliminated," and price growth is still expected to be below the 2% symmetric target over the medium term.
Policymakers did not discuss the future of the Pandemic Emergency Purchase Programme, which is set to conclude net purchases in March, or how the ECB might achieve its price stability target once pandemic-specific measures have ended, Lagarde said, adding that any tightening of monetary policy at this juncture would be premature.
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