ECB remains unclear on rate hike despite record inflation

Posted 14 April, 2022

The European Central Bank (ECB) confirmed on Thursday the ongoing normalization of its anti-crisis policy, but without being more explicit on a first-rate hike despite galloping inflation, remaining concerned about the risk of recession.

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".

And it is still expected that the first-rate hike will come "sometime later", without further details. The ECB maintained them on Thursday at their historically low level.

The Frankfurt institution is now 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.

Elsewhere, interest rates have started to rise, with the latest announcement on Thursday coming from the Central Bank of Korea, in the name of tackling high inflation.

Decided for a long time, the first increase on the side of the American central bank (Fed), of a quarter of a percentage point (0.25%) in March, will be followed by several others.

The ECB is reluctant to tighten the screw even if it is under pressure in view of the record level of prices in March, inflation in the eurozone approaching 8% over one year, almost four times the target of 2% aimed by the guardians of the euro.

 

"Colombes" versus "faucons"

 

But nothing is simple because the economic horizon has darkened considerably with the invasion of Ukraine by Russia.

Many eurozone countries could experience a decline in GDP in the coming quarters.

In addition, there are strict confinements in China, such as in Shanghai, intended to prevent the spread of Covid-19. This is again disrupting maritime trade, at a time when pressures on supply chains seemed to be easing.

In principle, a central bank should "not react to such a supply shock if its effects are perceived as transitory", explains Bruno Cavalier, an economist at Oddo.

But on this point, the ECB remained divided on Thursday, according to the statement of monetary policy decisions which suggests decisions to come at the next meeting in June at the earliest.

In the camp of the "doves" favorable to the maintenance of an accommodating monetary policy, the Italian Fabio Panetta, a member of the executive board, recently argued that such a surge in prices, linked to the high costs of energy and food, escaped largely within the control of the ECB and that reacting too quickly could undermine activity and employment.

The "hawks", supporters of a strict 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.

The challenge is therefore to make monetary policy react in time, failing which the institution would lose credibility.

- Sovereign yields -

Ms. Lagarde will also be questioned in front of the press from 12:30 GMT on possible tools to be deployed in the face of the risk of "fragmentation of the eurozone", as recently mentioned by the chief economist of the ECB, Philip Lane.

This beginning of fragmentation, within an area made up of 19 countries with very disparate economies, is recently evident in the rise in government bond yields.

This is a sign that the markets are preparing to be weaned on liquidity after seven years of debt purchases by the ECB, and then to see rates rise for the first time since 2011.

If the Frankfurt institution is still procrastinating on the rate hike schedule, it is because it "probably needs more clarity on the outlook for growth, inflation and bond yields before taking important decisions" and "concrete" rather in June, according to Holger Schmieding, the economist at Berenberg.

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