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15/ The February 2022 Governing Council: Monetary policy decisions confirmed, monetary policy statement recalibrated

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11/02/2022

Post de Gaston Reinesch, Gouverneur de la BCL

On February 3, 2022 the Governing Council confirmed (see the February 2022 monetary policy decisions) the decisions taken at its monetary policy meeting last December (see the December 2021 monetary policy decisions).

As far as net asset purchases are concerned, the main monetary policy decisions are as follows:

  1. The Governing Council in 2022Q1 is conducting net asset purchases under the Pandemic emergency purchase programme (PEPP) at a lower pace than in the previous quarter and will discontinue net asset purchases under the PEPP at the end of March 2022;
  2. the Governing Council intends to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2024;[1]
  3. monthly net purchases under the expanded Asset purchase programme (APP) will amount to €40 billion in the second quarter of 2022 and €30 billion in the third quarter. From October onwards, the Governing Council will maintain net asset purchases under the APP at a monthly pace of €20 billion for as long as necessary to reinforce the accommodative impact of its policy rates. The Governing Council continues to expect net purchases to end shortly before it starts raising the key ECB interest rates.

As for the key ECB interest rates, the Governing Council continues to expect them to remain at their present or lower levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term. This may also imply a transitory period in which inflation is moderately above target.

While the Governing Council in February 2022 confirmed the step-by-step reduction in asset purchases decided on in December 2021 to ensure that the monetary policy stance remains consistent with inflation stabilising at its target over the medium term, it is worthwhile to note that the February 2022 monetary policy statement contains, notably, two changes, namely:

  1. The December monetary policy statement pointed to the need to maintain flexibility and optionality in the conduct of monetary policy against the background of the uncertainty prevailing. The February monetary policy statement emphasises that the Governing Council needs more than ever to maintain flexibility and optionality in the conduct of monetary policy. The February 2022 monetary policy statement also recalls that the Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at its 2% target over the medium term. It does not reiterate, however, that potential adjustments could go “in either direction” as mentioned in the December 2021 monetary policy statement.[2]
  2. While already in December the inflation outlook had been revised up substantially[3], the February 2022 monetary policy statement acknowledges that inflation had further surprised to the upside in January.[4] The February 2022 monetary policy statement concludes that inflation is still likely to decline in the course of 2022, but to remain elevated for longer than previously expected.

Moreover, compared to the December statement, the Governing Council formally recognises in the risk assessment section of the February monetary policy statement that “compared with our expectations in December, risks to the inflation outlook are tilted to the upside, particularly in the near term”. If price pressures feed through into higher than anticipated wage rises or the economy returns more quickly to full capacity, the latest monetary policy statement points out, inflation could turn out to be higher.

While the explicit focus of the assessment of upside risks is on the short term, it implicitly also covers the possibility of upside risks to the projected inflation path over and beyond the short term.

In the light of the above it would not be entirely groundless to consider that the end of net asset purchases under the current APP could come sooner than might have been expected on the basis of the December assessment and the related monetary policy statement.[5]

[1] In any case, and as announced prior to December 2021, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.

[2] The monetary policy decisions have also been changed. Whereas the December decisions read “[T]he Governing Council stands ready to adjust all of its instruments, as appropriate and in either direction, to ensure that inflation stabilises at its 2% target over the medium term”, the February decisions read “[T]he Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at its 2% target over the medium term“.

[3] The December 2021 Eurosystem staff projections saw HICP headline inflation at 2.6% in 2021 (up from 2.2% according to the September 2021 ECB staff macroeconomic projections), at 3.2% in 2022 (up from 1.7% in September 2021) and at 1.8% in 2023 (up from 1.5% in September 2021).

[4] The risk assessment section of the February 2022 monetary policy statement also acknowledges that although uncertainties related to the pandemic have abated somewhat, geopolitical tensions have increased compared to last December.

[5] The recent inflation developments and their potential implications for the outlook for price stability will be addressed in a forthcoming blog article.