PRIMARY CONCEPTS
The European Central Bank has kept key interest rates unchanged despite record rises in inflation. The central bank’s benchmark refinancing rate remains at 0%, the rate on its marginal lending facility sits at 0.25% and the rate on its deposit facility was kept at -0.5%.
The lack of action comes at a time of increased pressure on the ECB. The 19-member region has seen inflation creep up month after month, with the most recent reading hitting a record 5.1% in January.
While the bank says that higher inflation will fade throughout the year, many economists are wondering whether consumer prices will remain high for much longer. A more prolonged period of higher inflation could put the ongoing economic recovery at risk.
ECB President Christine Lagarde said Thursday: “Inflation is likely to remain elevated for longer than previously expected, but to decline in the course of this year.” However, she added that the recent price increases are mostly driven by higher energy and food costs.
“Compared with our expectations in December, risks to the inflation outlook are tilted to the upside, particularly in the near term. If price pressures feed through into higher than anticipated wage rises or the economy returns more quickly to full capacity, inflation could turn out to be higher,” Lagarde also said.
Unanimous concern
“With the upside surprise we have seen first in December, second in January, I can tell you there was unanimous concern around the table of the Governing Council about inflation numbers,” Lagarde told CNBC’s Annette Weisbach at the press conference.
“We had a very thorough and in-depth discussion about inflation. We are focused on the latest information we have but also on the impact that it will have on our medium-term outlook,” Lagarde also said, noting that the ECB wants to take “the right steps at the right time” and it is determined “not to rush into a decision unless we had a proper and thorough assessment.”
The central bank updates its growth and inflation forecasts next month, at the time of its next policy meeting.
Hike prospects
The latest decision comes as market participants have started pricing in two rate hikes for the ECB this year. However, the central bank has tried to play down that possibility.
“The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realized progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilizing at 2% over the medium term,” the ECB said in a statement Thursday.
The latest ECB forecasts point to headline inflation of 3.2% this year — above the central bank’s target — before coming down to 1.8% in 2023 and 2024. “Higher and more persistent eurozone inflation will increase the pressure on the ECB to follow the Fed by promising a hawkish pivot,” Cedric Gemehl, an economist at Gavekal Research, said in a note Thursday.
“But the bottom line is that it is energy prices and supply-side constraints that are driving eurozone inflation, not excessive demand. This suggests that the ECB will continue to focus on returning monetary policy to its pre-pandemic settings, and that any swing towards outright hawkishness remains a distant prospect,” he added.
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