10 Jun 2021

Jan Krahnen: “The ECB does not participate in speculation on price developments”

SAFE Director sees the European Central Bank's (ECB) current monetary policy decision as an attempt to stick to the inflation target alone

At its meeting today, the ECB’s governing council confirmed the course of monetary policy easing pursued to date. Both, the current low key interest rates and the scope of the pandemic emergency purchase program (PEPP) thus remain at a constant level. Jan Krahnen, Director of the Leibniz Institute for Financial Research SAFE, offers his view on the matter.

“Everything revolves around expectations, in this case inflation expectations. Today's ECB communiqué rationally states that its policy will continue to be guided by facts, that is to say realized price changes, and not by any expectations. By not engaging in speculation about future price development paths, the ECB is doing the best to avoid expectation-driven inflation.

Such expectation-driven inflation would mean that the ECB raises interest rates in anticipation of future rising inflation, which can trigger a domino effect of rising prices and wages and make inflation expectations in a sense self-confirming. Thus, it is only logical that the ECB today neither has raised interest rates nor significantly reduced purchases.