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.

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”.

Record inflation and at the same time a lot of uncertainty

Inflation in the euro zone has reached exceptionally high levels – and has not proven to be as transitory as central bank experts had originally expected. “Inflation rates are indeed higher than expected, and they will last longer than initially thought,” said ECB chief economist Philip Lane of monetary union FAZ. Not only have fuel oil and gasoline become extraordinarily expensive, but food prices have also risen sharply. In Germany, for example, the price of butter recently increased by 17.6%, bread by 7.1% and vegetable oil by 30%. Even the so-called core inflation rate, which is inflation without highly fluctuating prices like those of energy and food, to which monetary policy pays more attention, reached 3% in the area euro. The ECB is targeting an inflation rate of 2% in the medium term.

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