ECB holds rates but it’s not a ‘non-event,’ economists say. Here’s why

The European Central Bank on Thursday kept policy rates unchanged for the fifth consecutive meeting, with its key interest rate at 2%, in line with the bank’s target.

The ECB commented Thursday that the inflation trajectory and wider economic conditions did not warrant a move at this month’s meeting, but warned that the outlook was unpredictable.

“Inflation should stabilise at its 2% target in the medium term. The economy remains resilient in a challenging global environment. Low unemployment, solid private sector balance sheets, the gradual rollout of public spending on defence and infrastructure and the supportive effects of the past interest rate cuts are underpinning growth,” the central bank stated.

“At the same time, the outlook is still uncertain, owing particularly to ongoing global trade policy uncertainty and geopolitical tensions,” it added. The euro was flat against the dollar, at $1.179, following the decision, which had been widely anticipated.

ECB President Christine Lagarde said at a press conference Thursday that the central bank would maintain its data-dependent and “meeting-by-meeting approach,” and would not be “pre-committing to a particular rate path.”

“In particular, our interest rate decisions will be based on our assessment of the inflation outlook and the risks surrounding it,” she said.

“Understanding how the ECB is thinking about risks is important to gauging the path of policy going forward,” they added, assessing what the rising euro exchange rate means for monetary policy when the euro zone’s inflation rate is already below the ECB’s 2% target, with flash data on Wednesday showing the rate had cooled to 1.7% in January.

“All else unchanged, the recent appreciation [of the euro] is disinflationary and reinforces the expected inflation undershoot. However, the scale of the impact depends on the circumstances.”

Currency appreciation tends to cause disinflation by making imported goods, raw materials, and energy cheaper, in turn lowering production costs and consumer prices. 

While that may be good for businesses and consumers in the short term, central banks are wary about disinflation, and potentially deflation, over the longer-term because it can trigger economic stagnation with consumers holding off purchases (in the expectation that prices will fall further) while businesses can see lower revenues and increased real debt burdens.

Over the past month, the euro has strengthened 0.75% against the dollar,…