ECB decision: no end to the zero interest rate policy in sight

Despite rising prices and a recovering economy, there is still no end in sight to the ultra-loose monetary policy in the eurozone. The ECB is also sticking to the bond purchases.

A turnaround in the key interest rate in the eurozone is out of the question, it is even a long way off in terms of time. In fact, at its council meeting today, the European Central Bank (ECB) decided to continue its ultra-loose monetary policy – regardless of the recent inflation rate and the strong economic recovery.

The key interest rate will therefore remain unchanged at the historically low 0.0 percent, and the bond purchase program will also continue unabated. In addition, the banks must continue to pay negative interest of minus 0.5 percent for overnight loans. With reference to its recently revised monetary policy strategy, the ECB has adjusted its monetary policy outlook.

Inflation is no reason to turn interest rates

According to this, interest rates will remain unchanged until the inflation rate has reached a constant and long-term level of two percent. For a transitional period, the inflation rate can also be above this mark. The recent rise in consumer prices above the target of two percent is therefore no reason for the central bank to intervene.

The ECB will continue the particularly flexible emergency purchase program for government bonds and securities from companies (Pandemic Emergency Purchase Program / PEPP) with a volume of EUR 1.85 trillion that was launched at the beginning of the corona pandemic until at least the end of March 2022. Although doubts about the necessity of such purchases are growing in view of the economic upturn, the central bank intends to increase the pace of securities purchases in the third quarter.

The central bank is thus helping highly indebted countries such as Italy, Spain and France so that they can use the income to finance their billion-dollar rescue programs and at the same time reduce their debt burden. Last week, ECB President Christine Lagarde once again rejected hopes that the anti-crisis course would end soon. “Now is not the time to talk about an exit strategy,” said Lagarde. “We have to be very flexible and not arouse the expectation that the exit will take place in the next few weeks or months.” In their revised longer-term outlook, the so-called forward guidance, the monetary authorities emphasize the term “persistence”.

Criticism from economists

The policy of the ECB is increasingly meeting with criticism from economists. “It is striking how selectively the ECB perceives current developments,” writes Friedrich Heinemann from the Mannheim research institute ZEW. “While the risks of new waves of infection are evidently being given a lot of attention, there is little interest in the unmistakable signals that parts of the economy are starting to overheat,” said the economist. The almost dramatic increase in producer prices should be considered just as carefully as the pandemic development. “All of these are signs that inflation has lost weight in the ECB’s objective function with the new strategy.”

Alexander Krüger from Bankhaus Lampe is of the opinion that a turnaround in the key interest rate is far from unthinkable, “it has even been stretched over time. All in all, the forward guidance is not very binding, it gives the ECB even greater flexibility” .