FRANKFURT (Reuters), Dec 16, 2016 – Following its policy meeting, the European Central Bank issued the following statement.

According to the Governing council, the economic recovery is progressing towards the medium-term inflation target. This allows for a gradual reduction in asset purchases during the next quarter.

However, monetary accommodation will still be needed to ensure inflation stabilizes at the target of 2% over the medium-term.

The current uncertainty means that the Governing council must maintain flexibility and option in the execution of monetary policies.

The Governing council took these decisions with this in mind: Pandemic Emergency Purchase Programme (PEPP). In the first quarter 2022, the Governing Board expects to make net asset purchases as part of the pandemic crisis purchase program (PEPP) at a slower pace than the last quarter.

At the end of March 2022, it will stop buying net assets under the PEPP.

The Governing Board decided to prolong the reinvestment horizon in the PEPP.

Now, it plans to reinvest principal payments made from mature securities bought under the PEPP up until 2024.

However, future PEPP portfolio roll-off will not be affected by the appropriate monetary policy position.

The pandemic has shown that, under stressed conditions, flexibility in the design and conduct of asset purchases has helped to counter the impaired transmission of monetary policy and made efforts to achieve the Governing Council’s goal more effective.

Under stressed circumstances, we will keep flexibility as a part of monetary policies whenever transmission threats jeopardize the achievement of price stability.

Particularly in an event of market fragmentation resulting from the pandemic the PEPP reinvestments may be adjusted flexible across time, assets classes, or jurisdictions.

These could be purchased bonds from the Hellenic Republic, over rollovers or redemptions. This would avoid any interruption in purchases in the jurisdiction.

To counter any negative shocks resulting from the pandemic, net purchases made under the PEPP may be reinstated if needed.

Asset purchase programme (APP) In line with a step-by-step reduction in asset purchases and to ensure that the monetary policy stance remains consistent with inflation stabilising at its target over the medium term, the Governing Council decided on a monthly net purchase pace of €40 billion in the second quarter and €30 billion in the third quarter under the asset purchase programme (APP).

From October 2022 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.

Net purchases will end soon, according to the Governing council before the ECB raises its key interest rates.

The Governing Council will continue to reinvest the principal payments on maturing securities bought under the APP, even if it increases the key ECB rate interest rates. It also plans to do so for as long and as possible to ensure favourable liquidity and ample monetary accommodation.

Key ECB Interest Rates The main refinancing operation’s interest rate and marginal lending facility interest rates will not change at 0.00%, 0.25% or -0.50%.

The Governing council supports its symmetric 2% inflation target. In line with its monetary strategy, it expects that the key ECB rates will remain at the current or lower levels till it views inflation at 2%. It also believes that the realised progress made in underlying inflation can be considered sufficient to support inflation stabilising at 2% in the medium-term.

Also, this could indicate that inflation may be moderately higher than target for a short time.

Refinance operations. The Governing council will monitor the bank financing conditions to ensure smooth transmission of its monetary policies.

The Governing Board will regularly evaluate how its targeted lending activities are contributing to its monetary policies.

It has announced that it anticipates that the special conditions under TLTRO III will end next June.

The Governing Council will also assess the appropriate calibration of its two-tier system for reserve remuneration so that the negative interest rate policy does not limit banks’ intermediation capacity in an environment of ample excess liquidity.

*** The 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.

At a press conference that starts at 14:30 CET, the President of the ECB will discuss the reasons behind these decisions.

(Balazs.Koranyi@thomsonreuters.com; +49 69 7565 1244; Reuters Messaging: balazs.koranyi.thomsonreuters.com@reuters.net)