Frankfurt, Düsseldorf, London The European Central Bank (ECB) is tightening its monetary policy much more slowly than the other major central banks. It is true that the ECB decided at its monetary policy meeting on Thursday to let its bond purchase program PEPP, which was launched during the pandemic, expire at the end of March. “PEPP has accomplished its mission,” said ECB President Christine Lagarde. At the same time, however, the central bank is increasing its second program, known under the abbreviation APP.
Michael Holstein, chief economist at DZ Bank, sees only a “hint of tighter monetary policy”. Ulrich Kater, chief economist at Dekabank, criticized: “The ECB shows hardly any risk awareness with regard to the development of inflation. Monetary policy in Europe will remain on the accelerator for most of next year. “
Criticism also came from the German Bankers Association: “Today’s overall package does not fit the significantly changed price environment,” said Managing Director Christian Ossig. In particular, he criticized the continued negative deposit interest rate: “In view of the extremely low real interest rate, there is a growing risk that the euro area will become increasingly unattractive, especially for long-term investors.”
>> Press conference: Read in the news blog how ECB President Christine Lagarde justified the ECB decisions.
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With the planned stop of PEPP, the ECB is drawing conclusions from the economic recovery and increased inflation. In the euro area this reached 4.9 percent in November. This is the highest value since the beginning of monetary union.
Due to the difficult mix of increased demand and supply bottlenecks, the ECB has now also increased its inflation forecasts significantly compared to the previous forecasts from September: It now expects 2.6 percent for the current year, 3.2 percent for 2022 and 2023 and 1.8 percent each in 2024. Your inflation target is two percent.
The forecasts for so-called core inflation, which excludes the more fluctuating prices for energy and food, have also been raised. The ECB now expects 1.4 percent for 2021, 1.9 percent for 2022, 1.7 percent for 2023 and 1.8 percent for 2024.
Lagarde repeated several times that inflation would remain high well into the coming year. “We are monitoring wage developments very closely. The forecasts include a relatively high wage level. So far we haven’t seen much of the second-round effects. “
Criticism for helping states
Although the ECB is saying goodbye to the PEPP emergency program, it retains a considerable amount of flexibility. Because: Even if the ECB no longer buys additional bonds via PEPP, it will keep the current bond portfolio in this program constant until the end of 2024 by replacing expiring paper; previously it had named 2023 as the year of discontinuation. She wants to use these replacement investments flexibly, as Lagarde pointed out several times. In this way, it can continue to specifically help individual countries to keep the yields of their bonds under control within the replacement purchases.
The Austrian central bank president Robert Holzmann had already indicated this possibility in an interview with the Handelsblatt. The option also helps Greece in particular, because Greek government bonds cannot be bought under the creditworthiness requirements of the regular APP program.
Lagarde also stressed several times that the ECB could revive PEPP if necessary. When asked, she did not rule out the possibility of exceeding the previous total volume of the program of 1.85 trillion euros.
Critics of the ECB accuse it of blurring the line between state financing by offering flexible support to individual countries. Such regulatory concerns had also contributed to Jens Weidmann’s retirement as Bundesbank president: in this capacity, he last attended the meeting of the Governing Council on Thursday. Lagarde said at the meeting that the decisions in the Council were taken “by an overwhelming majority”.
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The older bond purchase program APP, which is more tied to a fixed capital weighting of the euro countries, is to be increased from currently 20 to 40 billion euros per month from April in order to prevent an abrupt break in purchases. From July the purchases will then be reduced to 30 billion euros, from October to 20 billion euros and will then be retained for as long as the ECB believes is necessary to stimulate the economy. As part of the APP program, which has been in use since 2015, the ECB has so far invested more than three trillion euros in government bonds and corporate papers.
The ECB did not promise an end to the APP program. Since this is a prerequisite for interest rate hikes, nothing will happen on this point for the time being. Lagarde emphasized: “Given today’s circumstances, an interest rate hike in the coming year is very unlikely.”
The ECB left the deposit rate at the previous level of minus 0.5 percent. The banks must therefore continue to pay penalty interest if they park excess funds with the ECB. As expected, the key interest rate will remain at zero percent. It has been at this level since March 2016.
Interest rate turnaround at the Bank of England
The Bank of England has even initiated the turnaround in interest rates. It raised the key rate on Thursday from 0.1 to 0.25 percent. The decision in the monetary policy committee was clear with eight votes to one. The central bankers unanimously decided to let the bond purchase program expire at the end of the year as planned.
In view of the Omikron uncertainty, most observers had expected that the central bankers in London would postpone the rate hike again. However, the decisive factor here was apparently the high inflation: It had risen to 5.1 percent in November.
More: Will inflation stay high? These eight graphics show the arguments for and against