India, European Union walk on same lines; ECB too keeps policy rates unchanged due to unstable inflation

Unstable inflation rates across demographics are forcing central banks to keep monetary policy rates unchanged. While India’s inflation is likely to moderate in the second half of FY21, the deflation in the Euro area is likely to be negative until early 2021, said a report by Care Ratings. Euro area witnessed a deflation of 0.3 per cent in September, compared with a 0.2 per cent deflation in the month of August 2020. Headline inflation is likely to remain negative until early 2021 owing to oil price dynamics, weak demand in the tourism and travel related sectors, lower wage pressures, and appreciation of the euro, the report added. 

Given the unstable inflation rate, the European Central Bank kept the three key policy rates unchanged and decided to reconfirm its accommodative monetary policy stance in its latest monetary policy committee meeting. The interest rate on the main refinancing operations, marginal lending facility and the deposit facility has been kept unchanged at 0 per cent, 0.25 per cent, and (-) 0.5 per cent respectively. 

The European Bank has added that the policy rates may remain at the present or lower levels until the inflation outlook converges close to the 2% inflation target set by the ECB. The European Union is facing the return of the coronavirus wave that has renewed challenges to public health and the growth prospects of the Euro area and global economies. Care Ratings report underlined that Euro area’s economic recovery is losing momentum more rapidly than expected, after a strong yet partial and uneven rebound in economic activity.

Meanwhile, the Reserve Bank of India had also maintained the status quo on the policy rates in the latest Monetary Policy Committee meeting. RBI had added that there will be a recovery in global economic activity in Q3 of 2020, although downside risks have risen with the renewed surge in infections in many countries. The central bank had highlighted that global trade is expected to be subdued.

It is widely expected that the rebound could turn out to be stronger among advanced economies than in emerging market economies. MPC had added that the two key goals from the monetary policy perspective at the present juncture, in which output growth has declined sharply and inflation pressures remain, are enabling sustained recovery of the economy and moderation in inflation rate.