ECB to maintain ultra-low rates until inflation hits 2%

Bank purchasing €1.85 trillion in government and corporate bonds to help economy through pandemic disruption

The ECB said it would not back off its efforts to support the economy even if that resulted in a “transitory” period of inflation moderately above target. Photograph: iStock

The ECB said it would not back off its efforts to support the economy even if that resulted in a “transitory” period of inflation moderately above target. Photograph: iStock

 

Facing unease over the spread of a more-contagious variant of the coronavirus, the European Central Bank (ECB) has said it would maintain its stimulus in the form of ultra-low interest rates until inflation “durably” reaches its 2 per cent target.

The ECB said it would not back off its efforts to support the economy even if that resulted in a “transitory” period of inflation moderately above target.

The bank’s policy meeting on Thursday was the first to employ the bank’s new monetary policy strategy, which analysts say would permit the bank to employ stimulus for longer periods.

The strategy abandoned the bank’s old inflation target of “close to but below” 2 per cent in favour of a “symmetric” 2 per cent target that allows for extended stimulus in times of trouble – even if that means briefly overshooting the inflation target.

The bank otherwise left its key rates and stimulus programmes unchanged.

The bank is purchasing €1.85 trillion in government and corporate bonds to help get the 19-country euro zone economy through the disruption caused by the pandemic.

The purchases pump newly-created money into the economy and help keep longer-term borrowing rates low. The idea is to make sure credit is easily available so companies can get the financing they need to keep going.

The bank’s key interest rate benchmarks affecting short-term rates are at record lows. It lends to banks at 0 per cent, and takes overnight deposits from banks at minus 0.5 per cent, in effect taxing them for holding on to the money instead of lending it.

Concerns

Right now concerns focus on the spread of the more-contagious Delta variant, which has seen case numbers rise sharply in a number of countries. In Europe, case numbers are low but rising in Germany, the euro zone’s biggest economy.

The seven-day case rate has doubled in just 12 days; 48 per cent of the population has been fully vaccinated but the pace of vaccination has slowed.

Economists say the fact that more people are now vaccinated may blunt the economic impact of the Delta variant. But it could slow the recovery if it leads to unexpected new restrictions and makes consumers more cautious.

French prime minister Jean Castex said on Wednesday that his country was facing a “fourth wave” of the pandemic, with cases rising sharply among unvaccinated people. – PA