The ECB leaves its key rate unchanged despite inflation and the war in Ukraine

Dhe European Central Bank (ECB) leaves the base rate unchanged. While it has now stopped buying new bonds from the PEPP crisis programme, new bonds must be bought from the old APP bond purchase program until the summer, provided that nothing unforeseen happening.

“Sometime” after the end of bond purchases, however, interest rates must be raised. The Board of Governors announced it on Thursday after its April meeting. ECB President Christine Lagarde wants to explain the details at a press conference.

The statement read: “At today’s meeting, the Board of Governors considered that data received since its last meeting reinforces its expectation that net asset purchases under its program of ‘asset purchase is expected to be completed in the third quarter.’ Going forward, the ECB’s monetary policy will depend on incoming data and the evolution of the Governing Council’s assessment of the outlook: “In the current conditions of high uncertainty, the Governing Council will consider optionality in the conduct of monetary policy, gradualness and flexibility. The Governing Council will take all necessary measures to fulfill the ECB’s mandate to maintain price stability and help preserve financial stability.”

Jörg Krämer, Chief Economist of Commerzbank, commented: “Unfortunately, despite an inflation rate of 7.5%, the ECB did not decide today to end its net bond purchases earlier. and its negative interest rates.” This expectation is risky: “The more the ECB is to its very loose monetary policy, the more people’s inflation expectations rise and very high inflation becomes permanent.

Jari Stehn, chief European economist at investment bank Goldman Sachs, told FAZ: “We assume the APP will be halted in July, followed by a 25 basis point rate hike in September and december”. Net asset purchases in June and an interest rate hike in July remain open if inflationary pressures continue to rise and economic demand remains robust despite the conflict in Ukraine: “However, normalization could be further delayed if demand is strong due to war “Beyond this year, Goldman Sachs expects three eurozone interest rate hikes in 2023, in March, June and December. In addition, the bank expects two increases in 2024 to an interest rate of 1.25%. “The Governing Council of the ECB has renewed its commitment to avoiding the risk of fragmentation,” Stehn told FAZ. In addition, the ECB would be more willing to intervene in peripheral bond markets rather than refrain from raising interest rates.

Public pressure on the ECB is great

Unlike the US Federal Reserve (Fed), which raised its policy rate by 0.25 percentage points, the ECB is keeping its main refinancing rate at 0% despite all the pressure from politics, the banking sector and the public and also maintains negative interest rates for banks. However, it holds out the prospect of a change and normalization of monetary policy.

Economics professor Lars Feld had suggested that the central bank could now announce an end to negative interest rates for September. Deutsche Bank boss Christian Sewing said he expected interest rates to rise “in the third quarter, or at the latest in the fourth quarter”.

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