The European Central Bank’s monetary policy should remain very loose for a long time. Central Bank President Christine Lagarde announced this at her regular press conference on monetary policy. Even after the acute crisis phase, the European Central Bank will support the Eurozone economy. Not long ago, the European Central Bank Council decided to leave the key interest rate at zero percent.
Obviously, inflation at the moment is not a panic for the ECB. The president said one would tolerate an increase in consumer prices beyond the 2 per cent target for a long time – how long that would last, it would stay open.
“Today’s board decision shows that a shifting monetary policy strategy brings not only new rhetoric, but a change of topic,” says Fredrik Heinemann, head of corporate tax and public finance research at ZEW Mannheim. “With expectations of revised interest rate policy, the European Central Bank is immunizing negative interest rates and bond purchases against a sudden strong rise in inflation for a long time to come.”
Alexander Krueger, chief economist at Bankhaus Lampe, predicts that the period of ultra-low interest rates will last much longer. “The shift in the key rate is not only elusive, it has been extended over time.”
Thus, Lagarde increases its scope to keep interest rates low for an extended period and to continue the bond-buying programme. This is likely to cause criticism, especially in Germany. Here, due to the recovery, inflation is above the eurozone average; In addition, Germans are particularly sensitive when it comes to inflation. In fact, low interest rates are poison to savings books that Germans love so much. On the other hand, the monetary policy of the European Central Bank ensures that companies can borrow money cheaply in order to grow and create jobs. The central bank makes it easier for eurozone finance ministers to launch growth programs and deliver expensive gifts to voters.
Lagarde sees greater uncertainty due to the delta variable
The inflation rate in the euro area was 1.9 percent in June. Experts assume that inflation will rise again in the coming months and may reach three percent or more in the second half of the year. This increase has various causes. On the other hand, the increase is also due to the fact that prices were lower in the second half of 2020 due to a decrease due to a temporary decrease in value-added tax in Germany. This effect has now been reversed.
In addition, due to the very strong recovery of the global economy in many places, many industries are struggling with material shortages. For weeks, for example, there have been widespread bottlenecks in building materials or microchips – and this has driven up prices. Energy prices are also rising sharply because crude oil is now much more expensive than it was a year ago.
Lagarde’s comments regarding the pandemic made people stand up and take notice. The French woman said the spread of the delta variable was increasingly becoming a “source of uncertainty”. “It will take some time before the negative consequences of the epidemic are eliminated,” she added. Of course, Lagarde cannot say when this will be the case and when the pandemic will lose its horror. “The monetary policy board is mainly made up of economists and lawyers, not virologists,” she said. So it is clear that the ECB will not reduce its bond purchases for the time being, which is also keeping interest rates low in the Eurozone.
ZEW economist Heinemann criticizes the new strategy and its implementation. “It is remarkable how selectively the ECB perceives current developments. While the risks of new waves of infection seem to be getting a lot of attention, there is little attention to clear signs that parts of the economy are starting to pick up. In practical terms, all of this means zero and negative interest rates will continue “until at least 2023.”