The ECB surprised few in leaving rates unchanged, reaffirming easy monetary policy, and a "tolerance" for inflation overshooting. The central bank has a big task ahead managing inflation, a recovery, and sub-zero interest rates, a reading of yesterday's guidance from the industy found.

At last Thurday's meeting in Frankfurt, the European Central Bank said it would hold the current negative rate of 0.5 per cent until inflation hits 2 per cent, keeping monetary policy loose, and the tone dovish. "It is clear that the ECB will let inflation and growth run hot rather than risk the recovery," Neil Birrell from Premier Miton said. "How the ECB envisions achieving an even more ambitious target with the same old tools and configurations remains unanswered," PIMCO's Konstantin Veit said.

Here are reactions from a number of wealth managers:

Xian Chan, chief investment officer, Wealth Management, HSBC
“There are two ways one can look at this month’s ECB meeting. On one hand, nothing has really changed, in the sense that the ECB remains committed to keeping financial conditions loose, especially in an environment where there are concerns around the spread of the Delta variant. After all, there is no change this month to the Pandemic Emergency Purchase Programme (PEPP) or key benchmark rates.

But on the other hand, market professionals are scrutinising word by word how the ECB’s recent strategy review is being implemented. Specifically, the language used by the ECB is now more forceful, in the sense that it is tying interest rates to its 2 per cent target to show its strength.

This is a key development the ECB needed to make because markets going into the meeting were unconvinced it could successfully stimulate activity and inflation. The market (according to the 5-year inflation swap) had been assuming inflation of just 1.6 per cent, which is significantly lower than the 2 per cent target. We know from June’s release that the ECB expects inflation to remain low at 1.4 per cent in 2023. So, the bank really needed to show how it could be more “forceful or persistent” around forward guidance and it didn’t disappoint.

This news should be a short-term positive for European stocks and the overall recovery trade, providing additional support especially amidst rising nerves over the Delta variant. The strong signal that the ECB will be keeping rates lower for longer is also an indication that the euro could trade lower. We’ve got our eye on whether market-implied inflation starts to increase, as this will indicate how convinced markets are that the new forward guidance will be effective.

All in all, this is positive news for the recovery story.”

Seema Shah, chief strategist, Principal Global Investors
“After the somewhat underwhelming ECB Strategy Review, markets were looking for clear forward guidance and specific details on what this new strategy means for policy. Unfortunately, the ECB statement was very flat, simply relying on a series of adverbs to drive home its dovish shift. If the press conference follows suit, markets may be severely disappointed.

“In truth though, Lagarde is unlikely to let this opportunity go. She recognises that the ECB’s credibility has to be earned and will likely use the press conference to emphasise their inflation tolerance. Even so, the ECB will likely fall short of the Fed’s efforts – partially reflecting simmering disagreements within the Council which holds them from making fundamental change, as well as an ingrained reluctance to embrace a new, healthy inflation paradigm.”

Gurpreet Gill, macro strategist, global fixed income, Goldman Sachs Asset Management
"As expected, key words - persistent and tolerant - communicated during the conclusions of the ECB’s strategy review remained relevant at today’s ECB meeting. The central bank cemented its dovish policy guidance, noting its persistently accommodative policy stance may require policymakers to be tolerant of inflation overshooting its target.

We expect the ECB to maintain its status quo of “status low” for the foreseeable future, with rate hikes unlikely to be on the policy agenda until the second half of this decade at the earliest. Looking ahead, we think investor focus will be on the outlook for asset purchases, with the Pandemic Emergency Purchase Programme (PEPP) scheduled to end in March 2022."

Neil Birrell, chief investment officer, Premier Miton
“It was no surprise that the ECB left rates unchanged, but it has changed forward guidance and has committed to a persistently accommodative monetary policy. It is clear that the ECB will let inflation and growth run hot rather than risk the recovery, saying that rates will stay at this level or lower until there is certainty about inflation stabilising around the desired level. The ECB is still very much in the “we will do what it takes” camp.”

Konstantin Veit, portfolio manager, PIMCO
"The changes to forward guidance on interest rates were broadly in line with expectations. Similar to the Bank of Japan’s inflation overshooting commitment, the ECB’s reference to transitory overshoots probably won’t durably impress markets given the long history of missing the previous, more conservative definition of price stability.

In September we believe the ECB will start to prepare for an end of PEPP and an upsize of the regular APP [Asset Purchase Programme] in 2022, to maintain easy financing conditions beyond the end of the pandemic emergency policy measures, as progress towards the inflation objective remains inadequate.

The new forward guidance reaffirms easy monetary policy for long, which in itself is a tailwind for risk assets.

The question of how the ECB envisions achieving an even more ambitious target with the same old tools and configurations remains unanswered."

Daniele Antonucci, chief economist  and macro strategist, Quintet Private Bank
“By tolerating temporary inflation overshoot to make up for past undershoots, this formulation is likely to allow the central bank to stay dovish even if inflation was to spike temporarily later this year, with interest rates at rock-bottom and continued asset purchases.

More fundamentally, high inflation is a high-class problem in the euro area, with the outlook impacted by a range of cyclical and structural factors. The new guidance puts an emphasis on actual data, not forecasts: realised underlying inflation needs to pick up, while any expectation for overall inflation to meet the target and stay there has to come in the early [part] of the forecast horizon.”

Ben Carter, analyst, Global Capital Markets, Validus Risk Management
“Much like the Fed, the ECB will be letting inflation run hot and are looking for prints of 2 per cent “durably” for the rest of the projection horizon before considering any change in rates. Meanwhile, as expected, there were no changes in the PEPP and this is looking like it will be a decision for later in the year, possibly the start of 2022, shifting the attention to the September meeting. With lots of talk around the Fed beginning to taper their purchases before year end, the euro may struggle to gain any ground against the dollar over the next few months as Lagarde comments that inflation has picked up but remains subdued.

“Leading up to the decision, volatility in the euro was subdued and euro/dollar traded below 1.18. Looking ahead, Lagarde’s dovish comments around inflation decreasing next year, due to significant slack in the economy, does not bode well for the euro, while any rate hike certainly seems a long way off.”

Patrice Gautry, chief economist, UBP
"The ECB will now also tolerate inflation above the 2 per cent target and this tolerance is a judgement and not the result of a mathematical formula, thus opening up a lively debate in the next few boards meetings.

The gap between the projected inflation in 2023 (1.4 per cent) and the 2 per cent objective is such that one could have expected a more "aggressive" statement on central bank purchases, and why not an extension of either the duration or the amounts of the PEP or the APP; but this is postponed to the next meeting in September.

While the central banks' landscape is fracturing between those that are already raising rates (Latin America), reducing their purchases, or not changing their strategy, the ECB is taking a bend in favour of a potentially still extremely accommodative policy: thus, by 2023, while the Fed and other central banks will be in the process of raising their key rates, low inflation in the eurozone would force the ECB to remain accommodative and become even more aggressive in the very short term."