Zurich, Frankfurt The European Central Bank (ECB) is sticking to its ultra-loose monetary policy despite rising inflation. Only at the next meeting on December 16 will the council decide how to proceed with the billions in bond purchases and what steps to follow. The ECB boss Christine Lagarde announced on Thursday. More importantly, there is still no end in sight to the low interest rates.
At the same time, inflation rates are rising in the euro zone. In Germany, the inflation rate rose to 4.5 percent in October – the highest level since October 1993. In September it was 4.1 percent. At the end of the year, economists even expect five percent, but after that a significant decline.
Lagarde is still convinced that the strong inflation is temporary, driven by high energy prices, supply bottlenecks in the wake of the economic recovery and base effects such as the temporary reduction in VAT in Germany in the wake of the corona crisis.
“We expect inflation to fall over the next year,” said Lagarde after an ECB meeting that saw no new decisions. But she also admitted: “It will take a little longer than originally expected.”
Top jobs of the day
Find the best jobs now and
be notified by email.
She referred to surveys conducted by the ECB among companies, according to which most of them do not expect the supply bottlenecks to be resolved in the first quarter, but at the latest by the end of the year, which are currently largely responsible for the high prices. In the medium term, it is still to be expected that inflation will even be below the ECB’s target of two percent. In the euro area, inflation was last at 3.4 percent, the October estimate is expected this Friday.
Deka chief economist Ulrich Kater agrees with Lagarde: “The ECB cannot and should not intervene against the current high inflation rates, as they will regress again in the coming year,” he said. “However, it must signal more clearly than before that it would tighten monetary policy if the price trend in the coming year turns out to be higher than expected. Otherwise it runs the risk of its credibility being scratched. “
The US Federal Reserve should already be outlining the way out of the ultra-loose monetary policy concretely in the coming week and is thus one step ahead of the ECB. However, many experts estimate the risk of the economy overheating to be greater there than in Europe.
Interest rate hike “not nearly” in prospect
Lagarde clearly opposed the expectation of the capital markets that the ECB could raise interest rates as early as the end of 2022. This was “not nearly” in prospect, she emphasized, and indicated that the markets were probably expecting more inflation than the ECB itself. The key rate of the ECB is zero, the interest rate for commercial banks’ deposits at the ECB, which is more important in practice minus 0.5 percent.
Regarding the also controversial billion dollar bond purchases by the central bank, Lagarde said that the pandemic emergency program known as PEPP will “from today’s perspective” very likely expire at the end of March.
However, she was unable to elicit any comment on how things will proceed after that, this decision is due for December. Under PEPP, the ECB can buy bonds totaling 1.85 trillion euros, of which it has already exhausted a good 1.4 trillion. The program allows very flexible weightings and thus also the targeted support of individual states.
The big question is whether this flexibility should be maintained in any form after the expiry of the PEPP, which is likely to contradict the regulatory ideas of some members in the Governing Council. It is also unclear whether another bond purchase program with a volume of over 20 billion euros per month, known as APP, will be increased in order to avoid an abrupt decline in monetary policy support.
Bundesbank President Jens Weidmann announced his resignation last week and made no secret of the fact that he considered the emergency to be over and that, in his opinion, PEPP should not be continued in any form.
With his stance of paying attention to a strict separation of monetary and financial policy and taking high inflation very seriously, Weidmann saw himself increasingly in the minority in the ECB Council. He will remain in office until the end of the year and thus also a member of the Governing Council, so he will still be present at the December meeting. When asked at the press conference on Thursday, Lagarde said that she had worked very well with Weidmann. He did not resign from his position out of frustration because of his position on the Council.
Warning of a hasty exit
Agustín Carstens, General Manager of the Bank for International Settlements (BIS), warned of a hasty exit from the loose monetary policy. “There are many upheavals in economies,” he said recently, with a view to rising raw material prices and chaotic supply chains. But these are not a consequence of monetary policy. “The economies should be given time to find their way back on their path,” Carstens continued.
The BIS has central coordination and research tasks for the world’s central banks. It is sometimes better to live with slightly higher inflation rates instead of burdening the countries with high costs through rising interest rates and a possibly ensuing recession, explained Carstens.
However, he warned to remain vigilant: “At one point, monetary policy action may be necessary.” In many industrialized countries, however, this point has not been reached. There could be a need for action if the distortions along the global supply chains and rising raw material prices drive up inflation expectations in the markets.
More: These are the four most frequently named candidates for the Weidmann successor.