July 5, 2022

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The European Central Bank turns off the money spigot, but leaves interest rates unchanged

The European Central Bank turns off the money spigot, but leaves interest rates unchanged

The European Central Bank (ECB) is stepping in to rein in high inflation and almost shutting off the money spout. The emergency support will end in March of next year. The European Central Bank decided that the interest rate will not change, and will remain at zero percent.

To ease the transition somewhat, another ongoing asset purchase program, which dates back to the financial crisis, will buy more government and corporate bonds in the coming months.

The APP purchase program now buys up to 20 billion euros per month in debt, but it will be increased to 40 billion euros in the coming quarters. Then it goes back to 30 billion euros and in October 2022 again to 20 billion euros per month.

Flexibility

According to Bank President Lagarde, inflation rose sharply and will remain high for the foreseeable future. However, the economy is better able to handle the pandemic, so emergency support is no longer necessary.

In its latest forecast, the European Central Bank estimates inflation will rise to an average of 3.2 percent in 2022, but drop to 1.8 percent in 2023 and 2024, close to the ECB’s 2 percent target.

With that said, the ECB will retain the flexibility to resume emergency support and adjust reinvestment operations in its asset purchase program, if developments surrounding the pandemic, the economy and inflation give reason.

The United States raises interest rates

The US Federal Reserve, the central bank, also decided yesterday to stop emergency support and will also raise interest rates in three steps next year. The European Central Bank does not follow after raising interest rates and is only thinking of raising rates in 2023, when all emergency support will cease.

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