A few weeks ago, Mario Draghi, the president of the ECB, and ECB member Weidmann confirmed  interest rates would continue at a relatively low level as this would be very helpful for the governments of Eurozone countries to get their finances back under control. This indeed seemed to be absolutely necessary to us, and in a previous column we already pointed out the devastating impact on the public finances should interest rates on government debt increase by 1-2% on average.

Hundreds of billions of euros per year would have to be found to simply just cover the increased interest bill, without pushing through any fundamental changes. The low interest rate policy has been on the forefront for several years now, and after starting an asset purchase program, the ECB confirmed in 2016 that despite spending tens of billions of euros on asset purchases on a monthly basis, the interest rate policy would continue until after the asset purchase program ended.

This was confirmed a few weeks ago, but in a surprising move, apparently the European Central Bank did discuss a higher interest rate at the most recent meeting. And that’s quite surprising.

Source: Bloomberg

After all, why would one start to increase the benchmark interest rates if it’s still purchasing assets, which is a more direct way to impact the financial markets? And the ECB literally said it is reducing the asset purchase rate from next month on, by reducing the size of the program by 25%.

“ We continue to expect them [the interest rates] to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases. Regarding non-standard monetary policy measures, we confirm that we will continue to make purchases under the asset purchase programme (APP) at the current monthly pace of €80 billion until the end of this month and that, from April 2017, our net asset purchases are intended to continue at a monthly pace of€60 billion until the end of December 2017”