ECB likely to maintain low interest rates ‘for several years’

The European Central Bank (ECB) is unlikely to change its interest rate policy for "several years" despite a pick-up in inflation, according to Moody's.

The ratings agency said the recent strengthening of price growth across the euro area was down to “transitory factors” connected to the resumption of economic activity after lockdown and higher oil prices.

This would be short-lived, it predicted.

“After economic activity resumes as normal, the inflation rate will likely start to weaken in the second half of 2022 as the effects of one-off price increases begin to disappear from inflation data,” Moody’s said.

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Worries about rising inflation have triggered a bout of volatility in markets. However, investors have taken comfort from reassurances from the US Federal Reserve and ECB policymakers about the price rise being transitory. Data on Tuesday showed euro zone inflation accelerated to 2 per cent in May from 1.6 per cent in April, driven by higher energy costs to above the ECB's aim of "below but close to 2 per cent".

Consumer price inflation in the Republic rose to 1.1 per cent in April – the highest level in more than a year.

Slack

The euro area was “still ways off from exhausting its economic slack,” Moody’s said. “Thus, even if economic activity gains pace in the coming quarters, a buildup of sustained and broad-based inflationary pressures will take time,” it said.

“The ECB is likely to maintain its highly accommodative monetary policy for several years as it looks past a short-term increase in inflation rates and focuses on securing the euro area’s multispeed economic recovery from the pandemic,” it added.

The agency said it would not be clear until 2023 whether underlying inflationary pressures are truly and persistently rising.

A key challenge for the ECB would be divergent growth and inflation trends across euro area countries , which appear to be at different stages of recovery.

“ Moody’s expects inflation data to be quite volatile the rest of this year and much of next year because of one-time increases in the prices of goods and services.

It pinpointed the increase in VAT in Germany as a factor there.

"While a recovery is now in sight, it will likely take longer for countries such as Greece, Portugal, Spain and Italy to return to their 2019 level of activity than for Germany and France, " Moody's said.

Ireland was included among the countries likely to experience a faster recovery, albeit unemployment was predicted to remain elevated at 8 per cent in 2022.