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ECB Holds Tight on Interest Rates Despite Inflation Reaching a Record High

At its meeting today, the European Central Bank (ECB) decided to leave its key interest rate unchanged. This comes as little surprise, as analysts had already expected this, despite the fact that inflation in the eurozone has reached a record high and is way above the ECB’s 2% target.

The ECB left the interest rate unchanged at 0% and thus remains at its lowest level ever. It left the deposit rate that commercial banks have at the ECB at -0.50% and the lending rate at 0.25%.

However, the ECB announced that it will end its €1.85 trillion Pandemic Emergency Purchase Program (PEPP) bond-buying program in March.

The ECB has often stated that inflation in the Eurozone is caused by transitory factors and this inflation will moderate over time. The truth is that the ECB has underestimated inflation and through its huge bond-buying program plus low-interest rates is driving inflation even higher. During the press conference, ECB Chairman Christine Lagarde admitted to having been wrong again, “Inflation is likely to remain elevated for longer than previously expected but to decline in the course of this year […] Compared with our expectations in December, risks to the inflation outlook are tilted to the upside, particularly in the near term.”

If this is really true, it would be the first time that she was right.

In addition, she has previously signaled that the ECB is unlikely to raise interest rates in 2022 because inflationary pressures remain low due to wage growth.

The European Union’s statistical office Eurostat reported that the consumer price index (CPI) rose 5.1% in January, the highest since Eurostat began collecting data.

The PPI producer price index increased 26.2% YoY in December a new record high. In the previous month, the PPI had already risen sharply by 23.7%.

Financial services firm IHS Markit reported that the Purchasing Managers’ Index (PMI) for the manufacturing and services sectors in the eurozone fell to a low of 52.3 in January from 53.3 in December. This was the lowest level since February 2021 and below the initial forecast of 52.4.

However, the PMI remained above the 50 mark, indicating that the eurozone as a whole is continuing to expand.

The services PMI fell to a nine-month low of 51.1 in January from 53.1 in December.

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