European Central Bank Maintains Stable Interest Rates Despite Record High Inflation


The European Central Bank (ECB) has moved to tighten its policies faster in the face of record high inflation in the euro area and rising prices for other major central banks.

Nonetheless, some analysts saw a hawkish change in the tone of ECB President Christine Lagarde’s remarks at a press conference after the announcement of the policy decision. She said inflation risk was “upward-sloping” and refused to confirm that the 2022 card had no rate hikes, the first time the ECB had used such a phrase in years.

ECB Announced on February 3rd We adhered to our previous plan to continue to buy assets under the Pandemic Emergency Purchase Program (PEPP), but by March the scheme was zero. According to the ECB, purchases can be resumed as needed to counter the negative shocks associated with pandemics.

“Given the current uncertainties, we need more than ever to maintain flexibility and selectivity in implementing monetary policy,” Lagarde said. Speaking at a press conference Following a central bank board meeting on Thursday.

Another stimulus, called the Asset Purchase Program (APP), will reduce current monthly purchases from € 40 billion ($ 46 billion) to € 20 billion ($ 23 billion) from October. The ECB will stop the program shortly before it begins raising key interest rates.

Thursday’s decision also keeps the ECB’s deposit rate at a record low of minus 0.5 percent.

“The board is ready to adjust all measures as needed to ensure inflation stabilizes at 2% of the target in the medium term,” Lagarde said at the meeting. The basic case is that price growth slows at the end of the year.

Lagarde
European Central Bank Governor Christine Lagarde will address the European Parliament during a discussion on the ECB’s 2018 Annual Report in Strasbourg, France, on February 11, 2020. (Vincent Kessler / Reuters)

Inflation rates in 19 euro-using countries surged to 5.1% in the year to January, a record high. The surge in energy costs, which rose 28.6% annually, was the number one factor in headline inflation and surprised the consensus forecast for a more modest rate of 4.4%.

“Price increases have become more widespread as prices for many commodities and services have risen significantly,” Lagarde said, and most measurements of the underlying inflationary pressure have also risen in recent months. However, it is uncertain how long these will last. ..

Lagarde said short-term inflation risk is sloping upwards, noting that long-term inflation expectations are generally stable at levels just below the ECB’s target of 2%.

Lagarde emphasized more negative factors than before, but the risks to the economic outlook were labeled as “widely balanced.”

In the memo, ING Characterized analyst The ECB’s monetary policy decision to press the “copy and paste key” and keep the decision from the December meeting unchanged. But they confirm that Lagarde confirms her remarks about inflation risk as well as her previous remarks about not raising her interest rates in 2022 as part of a “significant hawkish shift.” I saw you refused.

“Although Lagarde emphasized the principle of sequencing, that is, to end the purchase of net worth first before the rate hike, the door to the rate hike is wide open,” they wrote.

“With all this in mind and assuming energy prices do not fall in the next four weeks, we expect the ECB to accelerate its reductions in net worth purchases, ending in September and allowing the ECB to raise deposits. We will evaluate it at least once by the end of the year, “the ING analysts predicted.

Tom Ojimek

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Tom Ozimek has a broad background in journalism, deposit insurance, marketing and communication, and adult education. The best writing advice he has ever heard is from Roy Peter Clarke.