What's going on?
The eurozone’s just like the US, only with fewer superheroes – and while both economies have stubbornly low inflation, as of Thursday both are keeping key interest rates unchanged.
What does this mean?
The European Central Bank (ECB to its friends) thinks things are getting better in the eurozone, but the economic outlook’s still incredibly uncertain; it therefore left its $1.6 trillion emergency bond-buying program and sub-zero interest rates frozen in place on Thursday. Both help make money cheaper to borrow – and should therefore encourage more spending, in turn boosting the prices of goods and services (a.k.a. inflation). The same’s true Stateside, only the US central bank is committed to unlimited bond buying alongside record-low rates. Despite both economies reopening, however, business and consumer spending has failed to push inflation back to target levels.
Why should I care?
For markets: With great power…
Lowering rates further seems an obvious way to boost inflation. But if the last decade’s any guide, there’s no guarantee that’d actually work – and the unintended consequences could cause more harm than good (tweet this). Lower rates hurt commercial banks’ profits – and if they’re struggling then they’ll be less forthcoming with loans for struggling businesses. The ECB’s low-rate-and-wait approach appears to tacitly echo the US Federal Reserve’s new plan: it’s happy to let inflation eventually overshoot its target so long as it averages 2% over time – the generally accepted indication of “stable” price growth.
The bigger picture: Greenback Goblins.
The flip side of the recently weakening US dollar is the euro’s relative strength. That helps eurozone businesses’ cash go further abroad, sure – particularly in the US, where the euro’s value in dollars exceeded $1.20 last week for the first time since 2018. But rising imports usually leads to less demand for local products, which could hamper eurozone inflation further.