ECB headquarters in Frankfurt, March 12, 2020 (AFP/Daniel ROLAND)
The European Central Bank (ECB) confirmed on Thursday the normalization of its anti-crisis policy without being in a hurry to raise rates despite the “serious” economic impact of the war in Ukraine, particularly on inflation.
At the end of the Governing Board, on which the observers did not expect a transcendental 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 PPP, will end. . in the “third quarter”.
The first rate hike, which was kept at a low on Thursday, is still expected to come “some time later”, without further details. And this despite a record price increase in the euro zone, which approached 8% annually in March, almost four times the 2% target set by the ECB.
“It can be early or late in the quarter, which is three months old” and “the exact schedule will be determined at the next meeting” in June, explained President Christine Lagarde.
Therefore, the Frankfurt institution remains the most anticipated of the major central banks, while the war in Ukraine has given a strong boost to prices with effects that could take hold over time.
Everywhere from Washington to London to Seoul on Thursday, interest rates began to rise to fight inflation.
But comparing the US and European economies “is like comparing apples and oranges,” Lagarde justified. “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 Russia’s invasion of Ukraine complicates the ECB’s task.
“The war in Ukraine is severely affecting the eurozone economy and has greatly increased uncertainty,” said Ms Lagarde.
Many eurozone countries could experience a drop in GDP in the coming quarters.
And a European embargo on Russian gas would have “a significant impact” on the economy, says the French.
New lockdowns in China, such as in Shanghai, to combat the Covid-19 outbreak are once again disrupting maritime trade, increasing pressure on supply chains.
The debate within the Governing Council then pitted the “hawks” against the “doves”: the former advocated maintaining an accommodative monetary policy so as not to jeopardize economic recovery in the face of inflation that was beyond the ECB’s control.
But the hawks, favoring a tougher approach and slowly gaining the upper hand in the debate, see the risk of inflation taking hold over time with the risk of further pressure for wage increases.
“Core inflation has exceeded 2% in recent months,” but the duration of this increase is “uncertain,” Lagarde noted.
– Sovereign debt risk –
In search of the slightest hint of a more aggressive tone on inflation, observers have dissected the ECB’s vocabulary.
The euro guardians’ announcement was “slightly more assertive” about the timing of monetary normalization, and “it would now take a severe recession or a sharp drop in inflation forecasts” to prevent an end to debt buybacks, it notes. Carsten Brzeski, economist at ING. .
“The journey of ‘monetary normalization’ has begun,” Lagarde said. “Everything is going according to plan … and we want to keep all options open.”
But if the Frankfurt institution is procrastinating, it’s because “it probably needs more clarity on the outlook for growth, inflation and bond yields,” according to Holger Schmieding, an 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 increase in government bond yields.
This is a sign that markets are preparing to become illiquid after seven years of debt purchases by the ECB, and then see rates rise for the first time since 2011.
If there is no new tool in the pipeline, “we could do it” and “we will develop any appropriate tool,” Ms Lagarde said.