European Central Bank leaves rates on hold despite rising inflation

European Central Bank (ECB) president Christine Lagarde
Christine Lagarde, president of the European Central Bank. Photo: Nicolò Campo/LightRocket via Getty Images

The European Central Bank (ECB) has voted to leave interest rates unchanged, with it being "very unlikely" to raise rates at all next year, despite inflation rising to record levels across the eurozone.

It said it will hold its benchmark refinancing rate at the historic low of 0%, with its pandemic emergency purchase programme (PEPP) due to end in March 2022. However, it will boost the pay of its regular bond buying to €40bn (£34bn, $45bn) in the second quarter of next year, and €30bn in Q3.

The rate on its marginal lending facility remained at 0.25% and the rate on its deposit facility was kept at -0.5%, in line with expectations.

Despite inflation across the bloc hitting a record high of 4.9% in November, ECB board members have instead turned their concerns to the coronavirus outbreak and economic deterioration, particularly in Germany, Europe's largest economy.

ECB president Christine Lagarde said in a press conference on Thursday that it was very unlikely to raise rates at all next year, with consumer price rises expected to go as high as 3.2%, and inflation to then stabilise at 1.8pc in 2023 and 2024.

"Inflation has risen sharply, owing to the surge in energy prices, and also because demand is outpacing constrained supply in some sectors," she said.

"Inflation is expected to remain inflated in the near-term, but should ease in the course of next year. The inflation outlook has been revised up, but inflation is still projected to settle below our 2% target over the projection horizon."

She added that the ECB expects the economic recovery to continue, driven by robust domestic demand, and as the labour market improves, but warned that the pandemic continues to weigh on consumer and business confidence.

Watch: Will interest rates stay low forever?

The ECB has remained one of the more dovish major central banks during the pandemic, maintaining a patient approach despite rising inflationary pressures, and keeping its distance from the Federal Reserve and Bank of England.

Earlier on Thursday, the Bank of England (BoE) hiked UK interest rates from record lows of 0.1% to 0.25% for the first time since the start of the pandemic in a bid to combat soaring inflation. The Monetary Policy Committee (MPC) voted by a majority of 8-1 to raise rates.

Meanwhile, the US Federal Reserve announced it was speeding up the taper of its pandemic financial support to $30bn (£22bn) a month last night, adding that it expects three interest rate rises next year, and three in 2023.

Read more: European markets up as Bank of England raises interest rates

"Rate increases were clearly never on the table but the wind-down of asset purchases had to be confirmed from the current position which, in our view, is distorting financial markets," Paul Craig, portfolio manager at Quilter Investors said.

"Should virus fears recede, 2022 looks set to be a decent year for the bloc economically speaking and as such it is in a good position to begin to scale back the extraordinary support."

He added: “Nevertheless, with such a broad array of inflation views on the governing council we expect it will be some time before rate hikes are on the table in the euro area."

Rachel Barton, Europe strategy lead for Accenture, said: “There is much uncertainty about what the Omicron variant means for the European economic recovery and business’ growth prospects going into 2022. Whether inflation rates have peaked or not, businesses will be breathing a sigh of relief that the ECB is not, for now, raising rates.

“Supply challenges and inflationary pressures have already dampened business confidence in the last couple of months. But despite this, it is critical that leaders continue adapting their operations and investing in the right technologies, such as cloud and data, and bringing in the right skills to remain competitive.”

Watch: What is inflation and why is it important?