Econostrum | Economic News in the Mediterranean

ECB decides to keep rates unchanged despite record low inflation

Written by Eric Apim on Thursday, February 3rd 2022 à 17:20 | Read 334 times

The ECB Governing Council maintains the status quo on key interest rates (photo: ECB)
The ECB Governing Council maintains the status quo on key interest rates (photo: ECB)
EU. At its meeting on Thursday 3 February 2022 in Frankfurt am Main, the Governing Council of the European Central Bank (ECB) decided to leave all its rates unchanged, i.e. the rates on the main refinancing operations, the marginal lending facility and the deposit facility (those entrusted by banks to the central bank instead of lending them to their customers). They therefore remain at 0.00%, 0.25% and -0.50% respectively.

The twenty-five members of this Council confirm the decisions taken at its monetary policy meeting in December 2021, despite the new (historic!) inflation record of 5.1% over one year (+5.0% in December 2021) announced the day before by Eurostat for January 2022. The European Union's statistics office attributes this rise mainly to the surge in energy prices (+28.6% in the euro zone in January 2022 compared with +25.9% in December 2021), and in particular those of gas and electricity (see graph below). "Geopolitical tensions have increased," notes Christine Lagarde, President of the ECB. The crisis between Russia and Western countries over Ukraine is influencing the evolution of Russian gas prices.
"Monetary policy cannot lower oil and gas prices," ECB Executive Board member Isabel Schnabel recently said.


A 2% inflation target

Energy weighs heavily in the inflation rate increase (chart: Eurostat)
Energy weighs heavily in the inflation rate increase (chart: Eurostat)
"We can't act immediately. If I raise interest rates, it will have an effect in six to nine months. The time it takes to move down the financing chain. But we are slowing down growth", Christine Lagarde had already warned in mid-January 2022. However, the ECB President refused, on Thursday 3 February 2022 at a press conference, to reaffirm that no increase in these key rates would take place in 2022. "I never make unconditional commitments and it is even more important at this moment to be very careful about that. So, as I said, we will assess the situation very carefully, depending on the data. We will do that work in March." In December 2021, she had described this risk of a hike in 2022 as "very unlikely."

The ECB has set itself an inflation target of 2% over the medium term. "The Governing Council expects the key ECB interest rates to remain at their current levels or at lower levels until it sees inflation reaching 2% well before the end of its projection horizon and on a sustained basis over the remainder of the projection horizon, and it judges the actual progress of core inflation to be sufficient to be consistent with inflation stabilising at 2% over the medium term. This may also give rise to a transitional period during which inflation will be slightly above the target," said an ECB statement published on Thursday 3 February 2022. According to Christine Lagarde, "inflation is expected to remain high for longer than expected, but to decline this year."

At the same time, the Governing Council maintained that the emergency net asset purchase programme to deal with the consequences of the pandemic (ENPP) will end, as planned, at the end of March 2022. At the end of January 2022, they represented almost €1630bn out of a total of €1850bn released.

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