The European Central Bank (ECB) will continue to keep the key interest rate in the euro area at a record low of zero percent following the latest steps to curb the corona crisis. It has been there since March 2016. The deposit rate has also remained at the previous level of minus 0.5 percent. As a result, banks must continue to pay penalty interest if they park excess funds with the euro central bank. However, the ECB has been granting exemptions from the penalty interest to relieve the banks since last autumn.
After his interest rate meeting in Frankfurt am Main, the ECB Ratum central bank chief Christine Lagard announced that the ECB was ready to adjust all of its instruments if necessary.
The bank had loosened its monetary policy several times in the past few months in view of the unprecedented economic downturn following the corona crisis. In June it increased its large emergency bond purchase program PEPPum 600 billion euros to 1.35 trillion euros. In addition, purchases were extended until at least the end of June 2021.
Securities buyers help states and companies alike: they don't have to offer high interest rates on their securities if a central bank is a major buyer on the market. In the crisis, states launched multi-billion bailout packages, which is a burden on households anyway.
ECB anticipates a 8.7 percent drop in GDP
Economists had expected the central bank to wait for further developments first. ECB President Lagarde said in a recent interview: "We have done so much that we have time to carefully evaluate economic data." The central bank expects a severe recession in the euro area this year with a gross domestic product (GDP) slump of 8.7 percent and inflation close to zero.
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 years. The ECB has therefore been in anti-crisis mode for years. The central bank's other bond purchase programs, which have been on hold since March 2015, have already reached an enormous volume of around EUR 2.9 trillion.
Government bond purchases controversial, especially in Germany
Government bond purchases are particularly controversial in Germany. The Federal Constitutional Court had criticized it at the beginning of May and made the Federal Government and the Bundestag responsible. Its aim is to ensure that the ECB subsequently checks whether the bond purchases are proportionate. Otherwise, the Bundesbank should no longer participate. The Bundestag sees the Karlsruhe requirements met. At the beginning of July, the MPs voted by a large majority for a corresponding cross-faction proposal.
The latest economic data and economic barometer for the euro zone have recently signaled an onset of an economic recovery. The Governing Council is likely to draw a more precise picture at its September rate meeting. Then it should be clear on the one hand how deep the economy has crashed due to the crisis and on the other hand how the EU states are shaping future finances.
In addition, the latest economic projections by the in-house ECB economists will also be available. This should make it easier to estimate how quickly the economy will recover and whether further monetary aid is needed.