ZEW Economist Friedrich Heinemann on ECB Interest Rate Decision

For the first time since the reformulation of its strategy, the ECB Governing Council discussed the future course of its monetary policy. With today’s decision, the ECB has changed its monetary policy outlook. Interest rates are now to be kept low until the ECB expects inflation to reach and stay at two per cent for the foreseeable future. It explicitly allows for transitional phases in which the inflation rate is above the two per cent mark. Previously, inflation prospects of “close to, but below two per cent” were named as a precondition for an interest rate hike. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, explains:

“Today’s Governing Council decision shows that the changed monetary policy strategy brings not only a new rhetoric but also a change in substance. With the revised interest rate policy outlook, the ECB is immunising its negative interest rates and bond purchases against a surprisingly strong rise in inflation for a long time to come. It is striking how selective the ECB is in its perception of current developments. While it seems to pay much attention to the risks of new waves of infection, there is little interest in the unmistakable signals that parts of the economy are beginning to overheat. In terms of monetary policy, the almost dramatic rise in production prices should in fact be observed just as carefully as the pandemic developments. All these are signs that, with the new strategy, inflation has lost importance in the ECB’s objective function. In practical terms, all this means that the zero and negative interest rate environment will continue until at least 2023.”