The European Central Bank remains determined to fight inflation

Posted Apr 14, 2022, 2:02 PMUpdated on Apr 14, 2022 at 2:13 PM

Neither the war in Ukraine nor the soaring borrowing costs of European states will derail the European Central Bank. At its monetary policy meeting on Thursday, it chose to continue its fight against inflation by gradually withdrawing the exceptional measures to support the economy.

The Frankfurt Institution did not increase its key rates. The deposit rate remains at -0.5%, the refinancing rate at 0% and the marginal rate at 0.25%. But she confirmed that she would reduce the monthly amount of her bond purchases next month. The envelope, which is currently 40 billion euros, will increase to 30 billion in May, then 20 billion in June.

And after ? The debate is intense within the Governing Council, which sets the monetary policy of the ECB. Already at the March meeting, the strongest supporters of monetary orthodoxy had asked for a precise end date to be set for the Asset Purchase Program (APP). This asset purchase program has supported the European bond market and maintained favorable financing conditions for European states almost without interruption since 2015.

Third trimester

The central bank has chosen to keep a little flexibility, reserving its decision on the final termination of this program until its June meeting. But she clarified that she planned a priori to end it in the third quarter. The question of when in the trimester is important. Because the central bank plans to raise its key rates “some time” after its last purchases. In other words, if it ceased the APP in July, it could proceed to a first turn of the screw in September. And a second in December. This is also currently the bet of the markets. The deposit rate would be set at 0%, leaving the universe of negative rates for the first time since 2013.

Despite the determined tone of its press release, the choice is difficult for the ECB, as the economic situation is so uncertain. On the one hand, inflation in the euro zone broke a new record since the creation of the single currency, standing at 8.5% over 12 months in March. Far beyond the 2% target set by the central bank to guarantee price stability.

Record inflation

More annoyingly, medium-term inflation expectations in the markets are now hovering above 2.5%. This pleads in favor of a strong and rapid reaction from the central bank. Especially since its major counterparts, the American Federal Reserve and the Bank of England in the lead, have already largely begun their movement to raise rates and are conducting a very aggressive tightening policy.

But on the other hand, as the more moderate members of the Governing Council remind us, the fundamental causes of inflation – in particular the rise in the prices of raw materials and energy – are mainly outside the European Union. . Monetary policy cannot do much about it. On the other hand, a premature tightening could weaken growth already damaged by the war in Ukraine. Economists are even beginning to predict a recession in Germany.

Press conference

The ECB’s new economic projections, which will be presented in June, will therefore be decisive for the evolution of monetary policy. In the meantime, the markets will follow with interest from 2:30 p.m. the press conference by Christine Lagarde, president of the central bank, in the hope of detecting some clues.

More information to come…

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