The ECB remains wait-and-see despite record inflation

ECB headquarters in Frankfurt, March 12, 2020 ( AFP / Daniel ROLAND ) The European Central Bank (ECB) on Thursday confirmed the normalization of its anti-crisis policy without showing any rush to raise rates despite the “severe” impact economics of the war in Ukraine, particularly on inflation. At the end of the Board of Governors, on which observers were not expecting a major decision, the institute reiterated its March signal in favor of price stability, announcing that the net purchases of assets, carried out within the framework of the APP, will end in the “third quarter”. It is still expected that the first rate hike, which was kept at its lowest on Thursday, will take place “some time later”, without further details. And this despite a record price increase in the euro zone, which came close to 8% over one year in March – almost four times the 2% target set by the ECB. “It can be early or late in the quarter, which has three months” and “the exact timetable will be determined at the next meeting” in June, explained the president Christine Lagarde. The Frankfurt institution thus remains the most wait-and-see of the major central banks, while the war in Ukraine has given a sharp boost to prices with effects that could take hold over time. Everywhere else, from Washington to London to Seoul on Thursday, interest rates began to rise to fight inflation. But comparing the American and European economies, “is like comparing apples and oranges”, justified Ms. Lagarde. “The euro zone is more exposed and will suffer more from the consequences of the war.” – “Doves” versus “hawks” – The considerably darkened economic horizon with the invasion of Ukraine by Russia complicates the task of the ECB. “The war in Ukraine is severely affecting the eurozone economy and has greatly increased uncertainty,” noted Ms. Lagarde. Many eurozone countries could experience a decline in GDP in the coming quarters. And a European embargo on Russian gas would have “a significant impact” on the economy, notes the Frenchwoman. New confinements in China, such as in Shanghai, to fight the Covid-19 outbreak are again disrupting maritime trade, increasing the pressure on supply chains. The debate within the Governing Council then pitted the “hawks” against the “doves”: the former advocated maintaining an accommodating monetary policy so as not to endanger the economic recovery in the face of inflation that was beyond the ECB’s control. . But the hawks, supporters of a stricter approach and slowly gaining the upper hand in the debate, see the risk of inflation taking root over time with the risk of increased pressure for wage increases. “Underlying inflation has exceeded 2% in recent months” but the duration of this increase is “uncertain”, noted Ms. Lagarde. – Sovereign debt risk – On the lookout for the slightest hint of a more aggressive tone on inflation, observers dissected the ECB’s vocabulary. The Euro guardians’ announcement was “slightly more assertive” on the timing of monetary normalization, and “it would now take a severe recession or a sharp fall in inflation forecasts” to prevent an end to debt buybacks, notes Carsten Brzeski, economist at ING. “The ‘monetary normalization’ journey has begun,” said Ms. Lagarde. “It’s going as planned…and we want to keep all options open.” But if the Frankfurt institution is procrastinating, it is because it “probably needs more clarity on the outlook for growth, inflation and bond yields”, according to Holger Schmieding, economist at Berenberg. The ECB is thus concerned about the risk of “fragmentation” within the euro zone of 19 countries with very disparate economies, which is reflected in the rise in government bond yields. It’s a sign that markets are preparing to be weaned on liquidity after seven years of ECB debt buybacks, and then to see rates rise for the first time since 2011. If no new tools are in the works, “ we could do it” and “we will develop any appropriate instrument”, commented Ms Lagarde.