European Central Bank leaves rates negative despite inflation hitting record high

The European Central Bank left interest rates unchanged in negative territory today despite inflation on the Continent running at a record high.

President Christine Lagarde and co kept borrowing costs at minus 0.5 per cent, where they have been for several years, sticking with its more dovish stance toward monetary policy.

The ECB has been less responsive to the rising cost of living compared to the world’s other top central banks, keeping interest rates negative for several years.

However, today it surprised markets by announcing it will strop net purchases of assets under its main bond buying programme in the third quarter of this year, earlier than expected, with rates then rising “some time after the end of the governing council’s net purchases under the [asset purchase programme],” adding hikes “will be gradual,” the ECB said.

Net purchases under the ECB’s pandemic bond buying programme will finish at the end of this month.

Prices are 5.8 per cent higher than they were a year ago in the group of countries that use the euro, the fastest rate of increase since the currency was created in 1999.

The Russia-Ukraine war is intensifying inflationary pressures already entangled in Western economies as a result of the conflict putting a rocket under energy prices.

The war has sent ripples throughout Europe’s financial markets, with stock markets jumping widely over concerns about the potential hit to the bloc’s economy.

“The Russian invasion of Ukraine is a watershed [moment] for Europe,” the ECB said.

This week, UK gas prices hit a record high of £8 per therm, while oil prices have reached levels not seen since 2008. 

The US Federal Reserve, the world’s most influential central bank, and the Bank of England have signalled their intent to shift policy from supporting economies through the Covid-19 to taming runaway inflation this year.

The Bank became the first major central bank to tighten policy since the onset of the virus last December and has hiked rates at successive meetings for the first time since 2004.

The rate setting committee is also expected to lift them a further 25 basis points at its next meeting on 17 March, sending rates to 0.75 per cent.

The Fed is also widely anticipated to hike for the first time since it unleashed a wave of cheap money on to financial markets to buffer them from the impact of the pandemic next Wednesday.

UK inflation hit a near 30 year high of 5.5 per cent in January.

Fresh US inflation data is released today.