Monetary policy of the ECB: no interest rate turnaround in the coming year

To analyse

Status: 16.12.2021 5:29 p.m.

While the Fed and Bank of England are tightening their monetary policy significantly, the ECB is sticking to its ultra-loose course. And this despite the fact that the ECB has to admit that it was wrong with its inflation forecasts.

By Klaus-Rainer Jackisch, HR

When it comes to describing current monetary policy, the players in the financial markets are often not squeamish: The President of the European Central Bank (ECB), Christine Lagarde, has long been called “Madame Inflation”; many consider the ECB as a whole Great hesitation and particularly harsh critics accuse the monetary authorities of only looking at the interests of the over-indebted euro states instead of devoting themselves to their actual task: to keep prices in check.

Klaus-Rainer Jackisch

PEPP becomes APP

As of today at the latest, the ECB is likely to be even more in the crossfire. Because while the central banks around the world are pulling the reins tighter and saying goodbye to their previous crisis policy in view of high inflation rates, the ECB is repeating the arguments it has put forward for months and does not even want to turn the interest rate screw in the next year. In any case, this must be inferred from today’s decisions by the Governing Council.

The European monetary authorities are also reducing their bond purchases – the PEPP program launched as a result of the Corona crisis will expire as planned at the end of March next year; by then the ECB will have invested around 1.85 trillion euros in bonds of all kinds on the international markets, especially in government bonds of the member states. But the central bankers will instead be spicing up their old bond-buying program called APP, which dates back to the times of the euro crisis.

APP was never completely discontinued, ran parallel to the PEPP program even in Corona times and comprised monthly bond purchases of 20 billion euros. According to today’s resolutions, it will be continued next year and topped up twice: According to this, bonds worth 40 billion euros will be bought monthly in the second quarter and 30 billion euros monthly in the third quarter.

From October it will then be reduced again to 20 billion euros per month – all in all, within this program, make bond purchases amounting to 330 billion euros in addition to the rest from the PEPP program. In addition, expiring bonds are to be reinvested. That is significantly less than in Corona times, but significantly more than with the other central banks.

Everyone is initiating the turnaround in interest rates – only not the ECB

The US Federal Reserve decided yesterday evening to phase out its bond purchase program in the coming year. Given a robust economy and an inflation rate of 6.8 percent in the US, there is no longer any need for supportive measures, admitted Fed Chairman Jerome Powell. He also announced that interest rates will rise in the coming year. They are currently in a range between 0 and 0.25 percent. On the financial markets, three interest rate hikes are expected, so that an interest rate of around one percent should be reached by the end of 2022.

The British central bank also made the U-turn today: Communicated somewhat unhappily, but still essentially expected, the Bank of England raised its key interest rate from 0.1 to 0.25 percent today. Other central banks in Canada and Australia had already tightened the reins of their monetary policy in the past few weeks or announced this step.

The ECB still does not want to hear about such measures. ECB President Lagarde justified the decisions today with the great uncertainty in the wake of the Corona crisis, which continues to make a loose monetary policy necessary. She again rejected a turnaround in interest rates: “It is very unlikely that we will raise interest rates in the coming year,” said Lagarde after the ECB Council meeting.

How does the ECB rate fit in with inflation expectations?

The decision is all the more surprising and, for many critics, inexplicable in view of the latest inflation forecasts by the ECB. While the monetary authorities had repeatedly emphasized in the past few months that the inflation rate would fall significantly and below the targeted two percent in the coming months, they have now turned around: For the coming year, the ECB is now expecting an inflation rate of 3.2 percent – almost twice as much as the 1.7 percent that was calculated in the last forecast, which is just three months old. In the next few years, the ECB now expects higher values, namely 1.8 percent for 2023 and 2024, after 1.5 percent previously forecast.

With today’s decision, the European Central Bank is cementing its ultra-loose monetary policy and sees no reason to change, even if the world around it comes to different conclusions. In the Governing Council, where opinions differed this time too, but also in the population, this is likely to cause a lot of conflict in the coming months.

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