• ECB’s first meeting since the new strategy took effect was mostly about aligning the language from the June decision to the review outcome. The bond-buying (APP and PEPP) guidance were unchanged.

  • The main new element worth highlighting is the forward guidance on rates stating that inflation has to reach ‘two percent well ahead of the end of its projection horizon and durably for the rest of the projection horizon’ which compares ‘to the end of the forecast horizon’ in June.

  • This also means that the new strategy is more focused on the duration of the accommodative policy stance and not the size of the support.

  • There was ‘disagreement at the margin’ on the wording.

  • Overall, markets showed only limited reactions to the meeting.

Stepped up inflation ambitions

The July ECB meeting marked the first time we are seeing the new monetary strategy in action (see also Flash: ECB Research - Strategic Review: Striving for symmetry, 8 July 2021). As policy rates have been close to the lower bound for some time and the medium-term inflation outlook remains well below target, ECB has adjusted its forward guidance on rates, in an attempt to underline its commitment to maintaining a persistently accommodative monetary policy stance. Policy rates are now expected to remain at their present or lower levels until ECB sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and that this is also confirmed by underlying inflation. This may also imply a transitory period in which inflation is moderately above target. Further, this also means that ECB wants to observe realized inflation printing closer to/at the target earlier in the forecast horizon (currently until 2023) compared to the earlier medium-term orientation (end of forecast horizon).

But without new monetary policy stimulus

Maintaining favourable financing conditions remains key for the recovery to turn into a lasting expansion and hence ECB bond purchase programmes will continue unchanged. The total PEPP envelope continues to amount to EUR 1850bn, with purchases conducted at least until March 22 and at a 'significantly higher pace in Q3 21 than compared to the start of the year, while APP purchases continue at a pace of EUR 20bn/month. Overall, the new forward guidance on rates is slightly more dovish than previously in our view, as it allows for a more persistent easy monetary policy stance. However, despite the changes in the wording, we do not see it as much of a change in a substance: no new monetary policy signals have been sent and the change is more related to the duration of support rather than the size of monetary stimulus.

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