Despite high inflation: ECB leaves key interest rate at zero percent

Status: 10/28/2021 2:37 p.m.

The European Central Bank (ECB) is sticking to its strategy despite the high rate of price increases. The base rate and bond purchases will remain unchanged.

The European Central Bank (ECB) is not changing the key interest rate or the volume of its bond purchases for the time being. This means that the central bankers are not being impressed by the current high inflation.

The ECB’s Monetary Policy Council, headed by President Christine Lagarde, left the key interest rate unchanged at its regular meeting at a historically low 0.0 percent – since March 2016. The deposit rate for banks will also remain at minus 0.5 after the ECB’s decision Percent. For short-term capital injections and so-called overnight loans, 0.25 percent interest is due as before. Likewise, the Pandemic Emergency Purchase Program (PEPP) for the purchase of government and corporate bonds with a value of 1.85 trillion euros will not be changed for the time being.

Two percent inflation as a target

A decision on the future of the program with the abbreviation PEPP is expected at the council meeting in December, when new forecasts for the economy and inflation are available.

Inflation has been climbing both in Germany and in the euro area for months. In September the rate of inflation in the currency area was 3.4 percent. That is the highest level in 13 years. In Germany, according to preliminary calculations, inflation even reached 4.5 percent in October. The ECB is aiming for an annual rate of two percent for the euro area in the medium term.

Influence of the VAT increase

Leading representatives of the central bank explain the rise in consumer prices with special factors such as the recovery in oil prices after the economic slump last year. The return to the usual VAT rates in Europe’s largest economy, Germany, at the beginning of this year is also made responsible for the rise in inflation in the euro area.

The meeting on Thursday is the first after the resignation of Bundesbank President Jens Weidmann, who is considered a critic of an expansive monetary policy and who has repeatedly warned of high inflation rates. Weidmann wants to give up his position at the end of the year.

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