The European Central Bank (ECB) is initially maintaining its ultra-loose monetary policy.

The central bank announced this on Thursday after the June meeting of the Governing Council.

The bond purchases as part of the crisis program should continue to be “significantly” more extensive than in the first few months of the year.  

Christian Siedenbiedel

Editor in business.

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    ECB President Christine Lagarde and the other council members left the key interest rates unchanged. The key to supplying commercial banks with money has been at a record low of 0.0 percent since March 2016. “The Governing Council assumes that the key ECB interest rates will remain at their current level or a lower level until it determines that the inflation outlook in its projection horizon is approaching a level that is reasonably close, but below 2 percent and that this convergence is consistently reflected in the dynamics of the underlying inflation, ”writes the central bank.

    A lot is at stake: The ECB continues to support Europe's economy with many billions.

    In the run-up to the meeting of the Governing Council, there was speculation as to whether the central bank might send a stronger signal in the direction of ending the bond purchases in view of the progress in vaccination and the easing for the economy.

    Different opinions in the Governing Council

    Since April, the central bank has also been pushing the gas: the ECB had increased the pace of bond purchases for the PEPP crisis program in the second quarter. It left the volume of the program at 1.85 trillion euros, but announced that the number of bonds purchased between April and June should be “significantly” above the previous level. In doing so, she wanted to ensure “favorable financing conditions” for the companies. In other words: The ECB reacted to an increase in yields on the market for government bonds, which could also make corporate loans more expensive and thus slow the upswing after the Corona crisis prematurely. The pace is to be set anew for each additional quarter. 

    How strongly the central bank should think about the time after the corona crisis is controversial in the ECB Council. Some southern European countries want to keep monetary policy relaxed for a particularly long time. Bundesbank President Jens Weidmann, on the other hand, recently warned several times that with the end of the crisis, the central bank must also change course: "Monetary policy in the euro area is committed to price stability and must tighten its reins again if the price outlook dictates," Weidmann emphasized.

    The ECB is currently confronted with rising inflation rates - but considers this to be a temporary phenomenon in the end of the crisis.

    Inflation in the euro zone was 2 percent for the first time in May.

    That was the highest level in two and a half years.

    The ECB's target of “below, but close to 2 percent” has actually been achieved or slightly exceeded.

    However, the ECB considers its goal to be "medium-term".

    And the central bank's medium-term projections have so far provided lower inflation rates.

    Very different inflation rates in the euro countries

    In addition, the inflation rates in the various euro countries are quite different. In May, Germany was in the upper group with an inflation rate of 2.4 percent according to the European calculation method and 2.5 percent according to the national calculation method. This is certainly one of the reasons why the issue is viewed more urgently in Germany than in some other countries - and the sensitivity to the issue of inflation is particularly high in Germany anyway, presumably for historical reasons. 

    Most recently, Luxembourg had the highest inflation rate in the euro zone at 4 percent. In the course of the year, 4 or possibly even 5 percent is expected for Germany in individual months. In other euro countries, the values ​​are in some cases significantly lower. Greece still has a negative inflation rate of minus 1.1 percent. So prices there continue to fall on average. Portugal, whose inflation rate was negative until recently, has now reached plus 0.5 percent.    

    The most recent increase in energy prices in the eurozone was 13.1 percent.

    In Germany, fuel alone had risen by more than a quarter over the year.

    But also many other raw materials and some preliminary products such as computer chips, everything to do with construction and many everyday items such as vegetables have become more expensive.

    It is no longer just an energy issue, said Karsten Junius, chief economist at Bank J. Safra Sarasin.  

    Is there more inflation coming to Europe from America?

    Former ECB chief economist Otmar Issing expressed concern at an event on Wednesday that America could bring Europe even higher inflation rates. "We don't know whether the inflation specter will flick past," said the economist. There are price surges from all possible directions. "America will decide whether this will result in greater inflation," said Issing. To accept a temporary overshoot of the inflation rate over the inflation target of two percent is "relatively inflation-prone" ".

    Once inflation really gets going, it could be costly to stop it, Issing warned. In such a situation of uncertainty, it is risky for a central bank to commit to a further expansionary course for a long time: "When a ship sails through the fog, you shouldn't tie up the rudder," said Issing. This could turn into a global risk.