“ECB sends signal that interest rates are likely to stay at currently low levels for the next years”

DIW president Marcel Fratzscher comments today’s announcements by the ECB as follows:

The ECB is focusing on continuity and trust in its decision to extend its purchase program and its liquidity program, so that both are unlikely to end before 2022. The most important message is the ECB's strong intention on keeping interest rates low for an extended period of time. The ECB grants itself ample flexibility to keep interest rates low also in the most affected countries by the pandemic and prevent further divergence in the euro area.

Extending such flexibility is wise as the risks to the economy and to financial stability are still substantial. The ECB cannot rule out that some banks in the euro area might get into difficulty. This would make it even more difficult for the ECB to fulfil its mandate sufficiently in the foreseeable future.

The ECB decision is a strong signal that interest rates are likely to stay at the currently low levels for the next five years. This could further boost asset prices, including equities and real estate. Whether the ECB can achieve its objective of keeping interest rates low and supporting the economy will, however, largely depend on the support by fiscal policy, both at the national level as well as the Next-Generation-EU program. The EU and Germany will have to change and improve their fiscal rules. Also Germany will most likely not be able to meet its own, narrow debt brake in 2022.