The European Central Bank (ECB) expects higher inflation and more growth this year in the monetary union. The ECB announced on Thursday in Frankfurt that the rate of price increases will reach 2.2 percent. The rate of price increases would thus be above the target of 2 percent. In June, the central bank had expected 1.9 percent. However, the ECB sees the inflation target as a medium-term target: Temporary overshoots must therefore be accepted. The inflation rate rose to 3 percent in August, the highest level in around ten years. In Germany it had reached 3.9 percent according to the national calculation. In the meantime, there is no longer a euro zone with a negative inflation rate, in which prices are falling on average. Estonia even has an inflation rate of 5 percent, Lithuania is 4,9 percent and Belgium 4.7 percent.

Christian Siedenbiedel

Editor in business.

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Nonetheless, the ECB sticks to its view that this is a temporary phenomenon related to the corona crisis.

"The increase is likely to be temporary," said ECB President Christine Lagarde at the press conference in Frankfurt.

“We assume that inflation will continue to rise this autumn, but will decrease in 2022.” Reasons for the higher inflation are higher oil prices, the return to the old VAT level in Germany and material shortages.

For 2022, however, the ECB economists raised their forecast from 1.5 to 1.7 percent and for 2023 from 1.4 to 1.5 percent.

They also predict stronger economic growth after the 2020 recession year.

The gross domestic product (GDP) is expected to rise by 5.0 percent in the current year.

In June the growth forecast was 4.6 percent.

"The recovery of the euro area economy is progressing," said Lagarde.

“At the end of this year, the pre-crisis level should be exceeded.” For 2022 4.6 percent and for 2023 2.1 percent growth are expected.

The pace of bond purchases will be slowed

ECB chief economist Philip Lane had recently explained in a Reuters interview that, due to high vaccination rates and previous lockdown measures, Europe may not be one of the regions hit hardest by the delta variant of the corona virus. The (ECB) apparently wants to take account of the progress made in combating the crisis and to reduce the pace of its bond purchases somewhat. In the fourth quarter, i.e. in the months of October to December, bonds for billions are still to be bought, but not quite as many as in the second and third quarters.

The Governing Council concluded that the favorable financing conditions can be sustained with a moderately slower pace of net asset purchases under the Emergency Asset Purchase Program (PEPP) than in the previous two quarters, it said in the press release sent at noon.

Most recently, the Eurosystem's central banks bought bonds for around 80 billion euros a month from the PEPP crisis program and an additional around 20 billion euros from the longer-term APP bond purchase program.

The central bank left the key interest rate unchanged, and it has not yet indicated a fundamental exit from bond purchases.

She pointed to the improved economic situation in the euro zone, but did not fail to mention the ongoing risks from the pandemic.  

Public statements by central bankers had recently suggested that something could change in bond purchases.

After the US Federal Reserve signaled that it could reduce its bond purchases later this year, there were calls from Europe to do something.

In addition to Austria's central bank chief Robert Holzmann and the Dutch central bank governor Klaas Knot, Bundesbank president Jens Weidmann had also said: He did not want to decide when the central bank will finally exit its crisis bond purchase program PEPP.

So far, the end of March next year is planned.

"So that the purchases don't have to end abruptly, we should reduce them step by step beforehand, if the situation allows," demanded Weidmann.

Financial markets have been a bit nervous lately

After all, there are strong arguments why the central bank could now take things a little easier with its bond purchases. Inflation in the eurozone has risen. In addition, the economy is growing noticeably, not only in Germany, but also, for example, in Italy. And last but not least, the financing conditions for companies and households are good. Last week, ECB Vice President Luis de Guindos signaled that the ECB leadership was not entirely averse to such considerations. He was quite confident about the economic development in the euro zone: "The latest data are very positive."

The question of how the ECB will continue to position itself has recently also preoccupied the financial markets. The nervousness on the German stock market had increased in the past few days. Price losses on the stock market were also attributed to the fact that investors held back out of caution.