ECB surprises with triple jump

The ECB adjusted its forward guidance at yesterday’s meeting. While the monetary policy statement previously stated that key interest rates would remain at the current level until at least the middle of next year, this outlook has now been extended to include the possibility of a low level of key interest rates. A reduction in the deposit rate is therefore only a matter of time. It should also be emphasised that the central bank superiors instructed the ECB staff to draw up proposals for the design of a tiered deposit rate. According to Draghi, a possible interest rate cut would be accompanied by mitigation measures. The ECB Committees are also mandated to examine possibilities for revitalising the Bond Purchase Programme (APP). In this context, Mr Draghis has pointed out that the ECB may also be targeting new asset classes. Even though the guardians of the currency have hesitated to lower interest rates, they have succeeded in sending out a „dovish“ signal. The market fantasy regarding further expansive ECB measures was supported. Should the ECB, however, hold still after the summer break, the disappointment on the financial markets would be great.

Inflation, which remains at a low level, and the recent further fall in inflation expectations continue to cause headaches for the currency guardians. According to the head of the central bank, the transfer of higher wages to consumer prices will take much longer than expected. The European economy, which is losing momentum, is also adding to the fact that the fundamental price pressure is weak. It is not very encouraging in this context that Draghi is increasingly sceptical about the economic outlook. It appears that the currency authorities have lost faith in their previous picture of an economic recovery in the second half of the year. Against this background, it is understandable that Draghi emphasises the need for a continued comprehensive monetary stimulus. In the event of an unexpectedly significant economic downturn, the head of the central bank also sees the European governments as obliged to take fiscal measures.

Since the central bank has not reached its self-imposed inflation target for some time now, there is discussion within the Governing Council of adjusting this. It is noteworthy in this context that the monetary policy statement already discussed the symmetry of the inflation target. This Council meeting could therefore provide the impetus for a fundamental revision of the inflation target and thus set the tone for the future orientation of monetary policy.

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