Even if the Eurozone economy is currently recovering somewhat, the European Central Bank (ECB) is leaving key interest rates at their current record low levels. Thus the main rate of supplying funds to commercial banks remains at 0.0 percent, which it has been since March 2016. The ECB also does not change the deposit rate of 0.5 percent. So banks must continue to pay interest on fines if they park the excess money with the central bank.
The central bank also announced that it intends to increase the pace of purchases as part of the PEPP Trillion Dollar Crisis Bond Purchase Program in the third quarter. The emergency purchase program for government bonds and corporate securities, launched in the spring of 2020, has already been lifted twice. The purchase limit is 1.85 trillion euros, and purchases are expected to continue until at least the end of March 2022.
This means that the central bank will stick to its very loose path to support the economy for the foreseeable future. Last week, European Central Bank President Christine Lagarde once again dismissed hopes that the anti-crisis path would soon be over. “Now is not the time to talk about an exit strategy,” Lagarde said. “We have to be very flexible and not raise the expectation that the exit will happen in the next few weeks or months.” “.
The background to this is the looser inflation target presented by the European Central Bank on July 8. In the future, the central bank aims for an annual inflation rate of 2% in the 19 countries in the eurozone. So far, the ECB’s inflation target has been “below 2%, but close to 2%”. Now the ECB is at least temporarily ready to accept a moderate increase or decrease of 2%.
With this “symmetric” inflation target, the central bank no longer has to respond immediately if inflation rates deviate up or down from the target percentage. In the opinion of economists and bank representatives, the European Central Bank is finding more leeway with its new 2% inflation target so that it can stick to its monetary policy even if prices rise.
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