ECB to retain record low interest rates despite rebound

Eurozone central bank is aiming for 'durable' period of 2 per cent inflation

The headquarters of the European Central Bank in Frankfurt, Germany. Reuters
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The European Central Bank will persist with record low interest rates until inflation in the eurozone reaches the ECB's 2 per cent goal.

Inflation has lagged below that level for much of the past decade and the target has slipped farther from its grasp since the Covid-19 pandemic began.

ECB president Christine Lagarde gave a warning that the spread of the Delta variant had led to growing economic uncertainty, as the bank kept up its major stimulus.

"The euro area economy is rebounding strongly," Ms Lagarde said on Thursday.

"But the pandemic continues to cast a shadow, especially as the Delta variant constitutes a growing source of uncertainty."

Ms Lagarde told of the effects of the strain on tourism and hospitality in particular.

"The reopening of large parts of the economy is supporting a vigorous bounce-back in the services sector," she said. "But the Delta variant of the coronavirus could dampen this recovery in services, especially in tourism and hospitality."

Ms Lagarde said the ECB expects economic activity to return to pre-pandemic level in the first quarter of 2022.

She said the guidance on interest rates was made to "underline our commitment to maintain a persistently accommodative monetary policy stance to meet our inflation target".

“The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00 per cent, 0.25 per cent and -0.50 per cent respectively,” the ECB, the central bank of the 19 eurozone countries, said.

Current ECB estimates project that inflation in the eurozone will not reach 2 per cent for at least two years.

“In reaching that target, the governing council expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching 2 per cent well before the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2 per cent over the medium term,” the ECB said.

"This may also imply a transitory period in which inflation is moderately above target."

Ms Lagarde said "inflation has picked up, although this increase is expected to be mostly temporary. The outlook for inflation over the medium term remains subdued."

The ECB's previous guidance said it would keep interest rates steady until it was happy that inflation expectations were converging to its target, and stop buying bonds under its quantitative easing programme shortly before that.

The shift in language was prompted by the new strategy unveiled earlier this month, when the ECB pledged to be “especially forceful or persistent” and even let inflation edge above 2 per cent because interest rates are near rock-bottom.

Governors from indebted countries, such as Portugal's Mario Centeno and Italy's Ignazio Visco, say the new strategy means the ECB should keep the money taps wide open for even longer.

But inflation hawks, who support tighter policy and typically come from countries with lower debt-to-gross domestic product (GDP) ratios, such as Germany, have been more cautious, as they expect price pressures to return sooner.

Inflation in Germany is already projected to surpass 2 per cent this year.

Updated: July 22, 2021, 3:46 PM