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MNI STATE OF PLAY: ECB Optimistic, But No Talk of PEPP Taper

ECB leaves policy settings unchanged and commits to continue bond purchases at 'significantly higher' pace than in Q1.

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The European Central Bank will continue buying bonds flexibly and in accordance with market conditions but still at a "significantly higher" pace than seen at the beginning of the year, ECB president Christine Lagarde said Thursday.

Lagarde said there was "unanimous support for the introductory statement and broad agreement over what was proposed", although she acknowledged some debate on the pace of purchases and some of the analytical aspects of the use of instruments.

"That's why I used the phrase 'broad agreement.' [...] There was some divergence about some particular aspects," she said. No other wording was proposed, Lagarde added.

The central bank left other policy settings unchanged, with the deposit rate remaining at -0.5%, new asset purchases under the ECB's APP scheme at EUR20 billion a month. The overall envelope for the pandemic emergency purchase programme remained at EUR1.85 trillion, although the president acknowledged there was scope to buy less, or to adjust PEPP to buy more, as need dictated.

INFLATION

Euro area inflation is expected to rise through the rest of 2021 as higher fuel costs and the unwinding of the German VAT cut work their way out of the consumer price index over the coming months, she said, predicting further, but temporary, inflation increases in a number of countries.

June's Eurosystem staff macroeconomic projections put average inflation at 1.9% over 2021, 1.5% in 2022 and just 1.4% in 2023. GDP growth is projected to hit 4.6% in 2021, 4.7% in 2022 and 2.1% in 2023, with risks surrounding the euro area growth "broadly balanced."

Euro area financing costs were broadly stable, Lagarde said, although there had been some evidence of tightening for corporate borrowers since the previous meeting. A sustained increase in the cost of borrowing for firms would be "unwarranted," she added.

Governing Council members expressed moderate optimism over the outlook for the euro area economy, Lagarde said, citing the pick up in the pace of vaccinations and the gradual easing of lockdown measures. Discussion about when to exit PEPP "will come in due course" she added, but would be premature at the present juncture.

Policymakers will now move on to the summer and discussions over the ECB's Strategy Review, any discussion of which was batted away by Lagarde Thursday, with little change likely in policy until September at the earliest.