European Central Bank does not raise interest rates despite record inflation

Rising and record-high inflation in the Eurozone still does not convince the European Central Bank authorities to raise interest rates.

“Interest rates on major refinancing operations, marginal lending facility rates and deposit facilities will remain unchanged at 0.00%, 0.25% and -0.50%, respectively.” – The European Central Bank’s Governing Council announced in a press release after Thursday’s meeting. This ruling has not changed for more than two years. The European Central Bank cut interest rates for the last time in September 2019. Their level is currently at an all-time low. Analysts expect the price of money to finally rise in September or December, and the cycle will continue into the next year.

“Any changes to the ECB’s key interest rates will occur sometime after the end of the net purchases by the Governing Council under the APP programme, and will be gradual,” the press release read.

Due to the “freeze” of interest rates, the market is paying more attention to the asset purchase programs run by the central bank in the eurozone. A month ago, the European Central Bank announced a reduction in the volume of asset purchases under the APP program to 30 billion euros in May and 20 billion euros in June from 40 billion euros previously planned for the month. The March statement also indicated the possibility of ending net purchases in the third quarter. Today, the Council has emphasized this possibility more clearly.

“At today’s meeting, the Governing Council concluded that data released since its last meeting reinforces its expectations that net asset purchases under the asset purchase program should be completed in the third quarter. Looking ahead, ECB monetary policy will be based on incoming data and the Governing Council’s assessment of the prospects in any time “.

“The Board of Directors also intends to continue reinvestment of full capital payments of outstanding securities purchased under the APP for an extended period of time after it begins to raise key interest rates for the European Central Bank, and in any event for as long as necessary to maintain favorable conditions. Liquidity and certainly Easy monetary policy ”- added.

The market considered the ECB’s decision too pessimistic. EUR/USD exchange rate It fell from 1.0910 to 1.0880.

The European Central Bank has not decided to raise record low interest rates despite the record pace of price growth in the Eurozone. HICP inflation accelerated to 7.5% in March. compared to 5.9 percent in February. This level clearly exceeds the central bank’s “symmetric” 2% target. Prices were rising faster than the target in all eurozone countries – in many countries CPI inflation exceeded 10%.

“The Governing Council therefore expects ECB key interest rates to remain at their current levels until the Board concludes that inflation reaches 2% well before the end of the projection horizon and remains at that level for the remainder of the projection horizon, and assesses progress in core inflation as much as enough, to be considered consistent with a stabilization of inflation at the level of 2% over the medium term” – wrote in the press release. The core inflation rate in the euro area was 3% in March.

“The board is ready to adapt all its instruments within its mandate, with flexibility if necessary, to stabilize inflation to a target of 2 percent over the medium term. The pandemic, under pressure, has shown flexibility in setting conditions and buying assets that helped counter disruptions in the transmission of monetary policy It helped the Governing Council pursue its objective more efficiently. Within the framework of the Governing Council’s mandate, and under tight conditions, flexibility will remain part of monetary policy as the risks of monetary policy transmission threaten price stability.” – summed up.

at. Christine Lagarde, President of the European Central Bank will speak at 14:30.

Lagarde: Energy prices are the main driver of high inflation in the eurozone

“Energy prices are the main driver of higher inflation, and according to market expectations, commodity prices will remain elevated in the near term. (…) It is not clear how sustained higher core inflation will be in the near term,” Lagarde said.

“GDP growth in the euro area in the first quarter will remain weak due to the epidemic restrictions. (…) the war in Ukraine remains a factor reducing consumer and business confidence. The war has created new bottlenecks in production,” she added.

The deterioration of the balance of risks to inflation expectations in the euro area

“Risks to inflation expectations have intensified, particularly in the near term. Risks to medium-term inflation expectations include changes in inflation expectations above target values, higher-than-expected wage increases, and continued deterioration on the supply side,” Lagarde said. If demand weakens in the medium term, that should reduce price pressure.”

“The risk of a deterioration in GDP growth prospects has increased significantly as a result of the war in Ukraine. While pandemic risks have decreased, the war may have a greater impact on economic sentiment and may exacerbate supply-side constraints. Rising energy costs, combined with a loss of confidence, could, she added, That lowers demand and limits consumption and investment to a greater extent than expected.”

The sudden boycott of Russian gas and oil will have a major impact on the Eurozone

“The sudden boycott of gas and oil from Russia will have a significant impact on the eurozone economy. We are aware that some countries will be more affected in such a situation than others. (…) Introducing a change in energy The mix that is made collectively within the structures of the Union The European is definitely a good solution, “- said the head of the European Central Bank.

Maciej Kalwasiński

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