European Shhhentral Bank

Image source: Domenico Fornas, 360b - Shutterstock

What's going on?

The European Central Bank (ECB) announced itd be leaving its coronavirus economic support plan in place on Thursday, in hopes it’ll keep investors sleeping soundly.

What does this mean?

Besides keeping its key interest rates unchanged, the ECB also said itd continue buying government and company bonds to the tune of some $2.2 trillion until at least March next year. That boost in demand for eurozone bonds has helped keep everyones borrowing costs low, and should continue to. But now that the annual rate of price rises is overshooting the ECBs target of just under 2% (even if only temporarily), theres an argument that Europe should slowly start to remove its economic training wheels just like Americas doing.

Why should I care?

The bigger picture: The US is running hot, hot, hot.


The ECBs update was followed by fresh data that showed American consumer goods and services cost 5% more last month than they did in May last year. That was higher than expected the highest since 2008, in fact, or 1992 if you strip out often-volatile food and energy prices (tweet this). But inflation should cool down on both sides of the Atlantic soon: the pandemic was still wreaking havoc this time last year, which means price growth is bound to look high in comparison. Things started getting back to normal in July though, so investors will find it a lot easier to tell if central banks hold-steady strategies are justified from next month on.



For markets: Consistently high inflation could be bad news.


There are two possible outcomes should inflation remain stubbornly high. If things get too expensive, people may spend less, which would slow economic and company earnings growth and send stock prices spiraling. Alternatively, central banks could step in and raise interest rates in a bid to limit further price rises. That would make new, higher-returning bonds more attractive, and encourage investors to sell both stocks and older bonds to buy them instead.

Originally posted as part of the Finimize daily email.

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