The Economy

ECB Keeps Interest Rates Unchanged in Eurozone

"The pandemic continues to cast a shadow, especially as the Delta variant constitutes a growing source of uncertainty."
Matthew HellerJuly 23, 2021

With the latest wave of the COVID-19 pandemic pushing its inflation target further into the distance, the European Central Bank has pledged to keep interest rates at record lows.

After a meeting of its 25-member Governing Council, the ECB said interest rates will remain unchanged in the 19 eurozone countries. It last raised rates in July 2011 and its benchmark rate is currently set at minus 0.5%.

The bank also revised its forward guidance, saying the Governing Council “expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching two percent well ahead of the end of its projection horizon and durably for the rest of the projection horizon.”

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Additionally, rates will not be raised until the council “judges that realized progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilizing at two percent over the medium term.”

The ECB had previously said it would keep interest rates at current levels until it was happy that inflation expectations were converging to its inflation target. But according to Reuters, the bank is concerned that “the rapidly spreading delta variant of the coronavirus poses a risk to the eurozone’s recovery.”

“The recovery in the euro area economy is on track,” she said. “But the pandemic continues to cast a shadow, especially as the delta variant constitutes a growing source of uncertainty,” ECB President Christine Lagarde told a news conference.

The eurozone has long been mired in low inflation, despite years of accommodative monetary policy. The ECB expects inflation in the zone as a whole to hit 1.9% this year before falling back to 1.5% in 2022 and 1.4% the year after.

“While the [U.S. Federal Reserve] moved in a more hawkish manner at its last meeting, the ECB has moved in the other direction with low inflation much more entrenched in the eurozone,” Jai Malhi, global market strategist at J.P. Morgan Asset Management, told The Wall Street Journal, adding that the new guidance maps “out a destination that looks unlikely to be reached anytime soon.”