The European Central Bank decided Thursday not to announce a significant change in its monetary policy stance, despite record-high inflation and its own acknowledgment that prices could continue to rise.
The bank still plans to stop buying bonds sometime in the third quarter and start raising interest rates shortly thereafter, although those rates are currently up to eight percentage points below the inflation rate.
By choosing not to act, the ECB is increasingly distinguishing itself from central banks in most other parts of the world, which have taken increasingly drastic steps to slam the brakes in recent weeks.
This week alone, the central banks of Canada and New Zealand raised interest rates by half a percent, while the US Federal Reserve has opened up about doing the same at its next monetary policy meeting in May.
The Frankfurt institution has reasons to take a different course.
The Eurozone economy is much more exposed to the war in Ukraine than any other region, even without further financial sanctions against Russia.
“While risks related to the pandemic have receded, the war could have an even greater impact on economic sentiment and further exacerbate supply-side constraints,” ECB President Christine Lagarde said in the opening statement at her regular press conference. “Persistently high energy costs combined with a loss of confidence could pull demand lower and restrain consumption and investment more than expected.”
But the push for low interest rates is leading to ever clearer calls for action, especially from Germany.
“The approach of a central bank committed exclusively to price stability should be clear,” said Helmut Schleweis, chairman of the German Savings Banks and Giro Association. “To counteract inflation with clear decisions and clear communication.”
The stance of the ECB also appears to be unsettling the markets.
The euro fell as low as $1.0758, its lowest level against the dollar since May 2020, while the yield on 30-year German government bonds rose above 1 percent for the first time since 2018. Spreads versus other countries’ bonds, which have widened in recent months as the ECB prepares to step down from support for the bond market, have been broadly stable.
Speaking from home, where she has been in isolation after testing positive for COVID-19, Lagarde acknowledged that the inflation picture has deteriorated since the ECB’s last meeting.
Frederik Ducrozet, an analyst at Pictet Asset Management, took the admission as an indication that the ECB’s survey of professional forecasters – something the ECB uses to check its own forecasts – could be “nasty” when released on Friday.
Still, Lagarde dismissed suggestions that the ECB would fall even further “behind the curve” in its policy response, repeating what she said was that the bank needed to remain flexible.
Analysts say “flexibility” is the ECB’s code for a plan B for the next few months should the European Union abandon its current reticence and impose a full embargo on Russian energy imports, which would have an immediate and far-reaching impact on the region’s economy. (A committee of six German think tanks said earlier this week that such a move would prompt German business shrink by 6.5 percent in the next two years).
Lagarde said it was “entirely premature to speculate on when such flexibility might be deployed,” and gave no details on a new tool the bank reportedly intended to ward off renewed “fragmentation” in euro-zone financial conditions prepared for national borders.
“It appears that the ‘anti-fragmentation program’ is not yet drafted,” Gilles Moec, the group’s chief economist at AXA, said via Twitter, “but the idea that it could act ‘immediately’ is a warning to those who want to push it spread widening trading.”
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