ECB Will Maintain Low Interest Rates Despite High Inflation

The European Central Bank (ECB) has kept key interest rates unchanged regardless of the record rises in inflation. The latest decision comes as market participants have started pricing in the chances of two rate hikes by the ECB this year.

While ECB’s US counterpart the Federal Reserve continues to threaten interest rate hikes amid rising inflation, the ECB has taken a different path. The President of the central bank, Christine Lagarde, said that they will “not rush into a decision,” deeming inflation as a short-term problem.

According to CNBC, the ECB’s refinancing rate will remain at 0%, and its marginal lending rate will stay at 0.25%, and its deposit facility rate will be kept at -0.5%.

The decision might come as a surprise given the rising inflation in the region, following the same happening in the United States. The Eurozones’ year-over-year inflation came in at 5.1% in January, dwarfing economists’ expected 4.4% inflation for that month.

Lagarde, however, admitted that inflation is expected to stick around for longer than expected, but it is expected to cool down towards the end of the year. In December last year, she made similar comments, describing inflation as a “hump” that eventually declines towards the bank’s target rate over the course of 2022.

Regardless, Lagarde did point out that inflation risks are “tilted to the upside” in the near term, compared to what the bank expected in December. She said that when the economy will return to full capacity, the inflation may run even hotter.

“We had a very thorough and in-depth discussion about inflation. We are focused on the latest information we have but also on the impact that it will have on our medium-term outlook.”

Lagarde made a distinction between the inflation in Europe and in the US, saying that it is currently supply-side driven, rather than demand-driven:

“We are unlikely to experience that same kind of inflation increases that the US market has faced.”