What’s going on?
The European Central Bank (ECB) announced in an update on Thursday that it won’t be tweaking interest rates, but it will keep being agonisingly cautious.
What does this mean?
You’d be hard-pressed to find an economist who was expecting the ECB to adjust key interest rates on Thursday. And spoilers ahead for any contrarians still out there: the central bank said it won’t increase rates until inflation hits its new target of 2% and stays there for a while (tweet this).
Still, the ECB did announce that it’ll keep buying bonds for as long as needed to support the eurozone economy. In fact, the central bank said it’ll probably spend more in the next few months than it did in the first few of this year. That demand should keep bond prices high and yields – and, by extension, effective interest rates – low, which should encourage economy-boosting borrowing.
Why should I care?
For markets: The ECB’s plan is working.
The ECB basically promised in March to do whatever it takes to limit European borrowing costs, and Italy’s 10-year government bond yield is a good way to track how well investors think it’s keeping its pledge. That yield has fallen from highs of almost 1% earlier this year to just 0.66% now. So if the ECB’s bond-buying has enabled Italy – the riskiest eurozone economy – to borrow so cheaply, the rest of the bloc must be paying even less. And that should help boost growth once we’re well and truly out the other side of this pandemic.
The bigger picture: How long is the ECB’s piece of string?
The ECB has dubbed its current spending plan its “pandemic emergency purchase programme”, which begs the question: when will the “emergency” be over? The answer will determine when and how quickly the central bank withdraws its bond-buying – and it’s one investors need to know if they want to avoid a severe case of whiplash.