ECB sticks to ‘step-by-step’ plan to trim stimulus despite record inflation

The European Central Bank has stuck to its plans for keeping interest rates unchanged while steadily reducing its bond purchases this year, defying critics who say it should tighten monetary policy faster in response to record eurozone inflation.

The ECB said on Thursday its governing council had “confirmed the decisions taken at its monetary policy meeting last December”.

Holding firm on its plans to provide a sizeable stimulus this year, the ECB said its deposit rate would stay at a record low of minus 0.5 per cent and reiterated plans for “a step-by-step reduction in asset purchases” over the next nine months.

Its € 1.85tn pandemic emergency purchase plan would still stop net purchases in March, it said, confirming the plan it unveiled in December to partially offset this by doubling an older bond-buying program to € 40bn a month before slowing its pace back to € 20bn by October.

The announcement came after data this week showed eurozone inflation hit a new record of 5.1 per cent in January, well above the ECB’s 2 per cent target. Soaring prices are fuelling criticism that the ECB risks falling behind the curve on inflation and being forced into a painful U-turn policy.

ECB President Christine Lagarde is expected to be questioned about the rising cost of living at a press conference on Thursday after investors bet the central bank will be forced to change course and raise rates several times this year.

Higher than expected inflation has already led the US Federal Reserve and the Bank of England to shift to a more “hawkish” policy stance. The BoE raised its main policy rate to 0.5 per cent on Thursday, less than two months after upping it to 0.25 per cent, while investors are pricing in five rate rises by the Fed this year.

Line chart of eurozone harmonized index of consumer prices (annual% change) showing the ECB expects inflation to fall below its target this year

In contrast, the ECB has continued to dismiss the idea of ​​raising rates this year. The central bank on Thursday repeated its stance that it will not raise rates until it forecasts that inflation will stay above 2 per cent for much of the next two years and even then it will only do so once it stops net asset purchases. It is due to publish new quarterly inflation forecasts in March.

Jürgen Stark, the German economist who left the ECB board in 2011 in protest over its bond purchases, accused the bank of having “grievously neglected increasing signs of prolonged and unacceptably higher inflation that could become self-reinforcing”. Writing in Die Welt newspaper last week, Stark said: “It is now time to shift into reverse gear.”

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