Monetary policy: The ECB is ready to temporarily accept inflation of more than 2 percent

The European Central Bank has decided to pursue an even more expansionary monetary policy in the future. The euro currency watchdogs are implementing the new strategy they have just adopted, in which they have adjusted the inflation target. During their meeting this Thursday in Frankfurt, they confirmed that the medium-term rate of inflation should stabilize at 2 percent. "This can also include a transition phase in which the rate of inflation is slightly above the target value," says a statement from the ECB. The choice of words used by the monetary authorities to predict key interest rates in the European Monetary Union has thus changed once again; it signals an even greater willingness to pursue a loose monetary policy than has been the case so far.

Meanwhile, the ECB left the key interest rate at a record low of zero percent.

The most important interest rate for supplying the banking industry with central bank money has been at this level since March 2016. At the same time, commercial banks still have to pay 0.5 percent interest for the money they hold in accounts at the central bank.

The ECB will continue the particularly flexible emergency purchase program for government bonds and corporate securities (Pandemic Emergency Purchase Program, PEPP) with a volume of EUR 1.85 trillion that was launched at the beginning of the corona pandemic until at least the end of March 2022.

Although doubts about the necessity of such purchases are growing in view of the economic upturn, the central bank intends to increase the pace of securities purchases in the third quarter.

The ECB's bond purchases help states and companies alike: They don't have to offer such high interest rates for their securities if a central bank is a big buyer in the market.

This is particularly important for states because during the Corona crisis they launched rescue programs worth billions that need to be financed.

Last week, ECB President Christine Lagarde once again rejected hopes that the anti-crisis course would end soon.

"Now is not the time to talk about an exit strategy," said Lagarde.

"We have to be very flexible and not arouse the expectation that the exit will take place in the next few weeks or months."

On July 8th, the ECB presented a more flexible inflation target. In future, the central bank is aiming for an annual rate of inflation of two percent for the 19 countries in the euro area. So far, the ECB's inflation target has been “below, but close to, two percent”. With this “symmetrical” inflation target, the central bank is no longer forced to react immediately if inflation rates deviate upwards or downwards from the percentage target. In the opinion of economists and bank representatives, the ECB is creating more leeway with its new inflation target of two percent in order to be able to maintain its extremely expansionary monetary policy even when prices rise.