The monetary policy of the European Central Bank is already expansionary like never before. Despite the lowest inflation, an expensive euro and an uncertain economy, the central bank is not opening its money gates any further than before. Investors are now waiting for clues for the coming months.
Dhe inflation rate is alarmingly low and the unprecedented economic slump in the corona crisis is unprecedented. But Europe’s monetary watchdogs are not backing up for the time being. As part of its emergency purchase program, the European Central Bank (ECB) wants to remain unchanged at 1.35 trillion euros in government and corporate bonds until at least the end of June 2021, as announced by the central bank in Frankfurt.
The ECB Council left the key interest rate in the euro area at the record low of zero percent on Thursday. Economists do not rule out that the ECB could increase its emergency purchase program again by the end of the year.
ECB chief economist Philip Lane recently warned against an overly optimistic assessment of the current economic recovery after the corona slump. The recent global surge in new infections will continue to weigh on consumer confidence and corporate sentiment for some time, Lane said. He made it clear that it will take some time before the economy will have fully recovered from the Corona crisis. Therefore, clear support through state aid measures and through monetary policy is still necessary.
The central bank’s securities purchases help states and companies alike: they do not have to offer such high interest rates for their paper if a central bank is a big buyer in the market. At the beginning of June, in the fight against the dramatic economic consequences of the pandemic, the monetary authorities almost doubled their PEPP (Pandemic Emergency Purchase Program) by 600 billion euros to 1.35 billion euros. The minimum term was extended by half a year.
The main goal of the ECB is a balanced price level with a medium-term inflation rate of just under 2.0 percent. However, inflation has been well below this target for some time. Europe’s monetary authorities have therefore been in anti-crisis mode for years. The central bank’s other bond purchase programs, which had been running with interruption since March 2015, had already reached a huge volume at a good 2.9 trillion euros at the end of August.
During the Corona crisis, the trend towards weak inflation rates intensified. In August consumer prices in the euro zone fell for the first time since 2016. According to an initial estimate by the Eurostat statistics office, the inflation rate fell to minus 0.2 percent. In July the rate was still plus 0.4 percent.
Falling consumer prices are a potential risk to the economy. They can trigger a downward spiral as consumers and businesses speculate that prices will continue to fall and keep investments pushed backwards.
The stronger euro, which has risen against the dollar in particular, can also depress inflation. This makes imports into the common currency area cheaper. In the opinion of economists at Landesbank Helaba, the expansion of the emergency purchase program remains an option, also to counteract a further appreciation of the euro.