Posted Jan 20, 2022, 7:21 PMUpdated on Jan 20, 2022 at 8:01 PM
The European Central Bank’s change of direction is confirmed. At its December meeting, the Frankfurt institution announced that it would end, in March, the net purchases of its exceptional program to combat the pandemic (PEPP). It was difficult to continue to flood the markets with liquidity when the recovery is well and truly here. And that, at the same time, inflation is soaring. This is what emerges from the “minutes”, the report of the discussions of the Board of Governors.
In December, the ECB revised its inflation forecast to 3.2% for 2022, double its expectations three months earlier. And even if the thesis of the central bank remains that of a return below its target of 2% at the end of the year, “a scenario of higher inflation for a longer period cannot be excluded”, underline the minutes. “The ECB has left the ‘temporary inflation’ team but has not yet joined the ‘permanent inflation’ team”, laughs Carsten Brzeski at ING. Unlike the US Federal Reserve and the Bank of England, already converted to the idea of inflation that lasts.
Repeated underestimations of inflation
The minutes testify to a certain calculation on the part of the governors of the ECB. Noting that “in the public’s perception, repeated understatements of inflation were likely to be more problematic than overstatements,” they were not overly concerned that “the December projections [contiennent] the largest upward revision [de l’inflation] “, since the ECB engages in this exercise.
Debates have also revolved around the relevance of the models used to forecast the evolution of prices. “Models calibrated on pre-pandemic data might not be well suited to capture major structural changes or a potential shift from a lower inflation regime to a higher inflation regime,” they noted. They suggest “paying close attention to relevant signals emanating from the real economy, including businesses and policy makers, rather than relying on past patterns. »
Differences on what to do
It was also necessary to reconcile the differences on the action to be taken in the face of the rise in inflation. The more orthodox were unenthusiastic about the temporary increase in volumes of the “classic” purchase program (APP) to mitigate the effects of the end of the PEPP on the markets, believing that this confused the message. Other governors for their part warned against “any premature reduction” of the ECB’s support for the economy.
The watchword for central bank action should therefore be adaptability. Christine Lagarde recalled it Thursday morning on France Inter. “We are ready, but we have every reason not to react as quickly and strongly as the Fed,” said the President of the ECB, recalling that inflation was “much lower” in Europe than in the States. -United. One way to debunk the hypothesis of a rise in key rates in the euro zone in 2022, which is increasingly widespread on the markets.