KOF Monetary Policy Communicator, July 2021

At today’s meeting, the Governing Council decided to keep the key ECB interest rates unchanged and to adjust its forward guidance. The ECB now expects the key ECB interest rates to remain at their present or lower levels until inflation reaches two per cent well ahead of the end of the ECB’s projection horizon and durably for the rest of the projection horizon, and the Governing Council judges that realised pro-gress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term.

According to Eurostat, Euro area annual HICP inflation was 1.9% in June. The current increase is mainly due to higher energy prices, base effects from the sharp fall in oil prices at the start of the pandemic and the impact of the temporary VAT reduction in Germany last year. The ECB expects headline inflation in the coming months to increase. Next year inflation is expected to decline again these factors fall out of the year-on-year inflation calculation. Although stronger demand and temporary bottlenecks in the supply chain will tend to increase prices, significant slack in the economy is holding back underlying inflationary pressures. Overall, underlying inflation is still expected to remain subdued reflecting low wage growth and the past appreciation of the euro.