ECB sends a dovish message as new strategy increases threshold for raising rates

Highlights:

• At today’s meeting the Governing Council the ECB put its new strategy into practice for the first time.
• Accordingly, the forward guidance was strengthened. Raising rates now requires reaching the inflation target “well ahead” of the end of the forecast horizon and “durably for the rest of the projection horizon” while underlying inflation has to be consistent with medium term inflation at 2%. The transitory moderate overshooting is allowed.
• As expected, no change to the quarterly PEPP purchases nor any other instruments was announced.
• We do not expect that the conditions for lifting rates will be reached soon. This leaves the ECB plenty to leeway to support financing conditions and thereby indirectly also government bonds.
• Looking further ahead, a beefing up of the APP after the termination of the PEPP in March 2022
  seems highly likely to us.

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