There were no surprises at yesterday’s Governing Council meeting. The bond purchases are to be reduced a little faster than previously planned, but a turnaround in interest rates is a long way off. Before the Ukraine war, there were still indications that the first interest rate hikes could take place this year. From the current perspective, this is again unlikely.
The fact that the ECB left all options open at yesterday’s meeting is understandable given the current situation. “The ECB was unable to do anything in view of the dramatic situation in Ukraine. That would only have contributed to further uncertainty,” says Teodoro Cocca, Professor of Asset Management at the JKU, in the OÖN interview.
The ECB’s hands are now tied, but it has brought itself into this situation by not taking the opportunity last year to take concrete steps against inflation.
dilemma worsens
It is incomprehensible that the ECB economists have so far misjudged inflation, says Cocca. They had to correct their forecast yesterday from 3.2 to 5.1 percent. Yesterday, however, ECB boss Christine Lagarde insisted that this high inflation rate was caused by the sharp increase in energy prices and that it would fall again.
“What we haven’t seen so far is wage pressure,” Lagarde said at the press conference after the Governing Council meeting.
When asked how long the shock from energy prices would last, Lagarde answered evasively. Energy prices would stabilize over the projection horizon. The projection horizon extends to 2024.
Inflation data came out of the US at the same time as the ECB press conference. Inflation there accelerated to 7.9 percent. This is the highest value since 1982. Unlike the ECB, however, the US Federal Reserve has already announced a turnaround in interest rates. A first step upwards is expected on the financial markets in mid-March, with further hikes likely to follow.
The ECB, on the other hand, has its hands tied. “It would not have been the right response to make an unsafe situation even more unsafe,” Lagarde said yesterday. Because the economic prospects have now clouded over. In its forecast presented yesterday, the ECB anticipates 3.7 percent economic growth in the current year. In December, the central bank was still expecting an increase of 4.2 percent. In 2023, gross domestic product (GDP) in the euro area will increase by 2.8 percent. Russia’s war against Ukraine is also hitting Europe’s economy, which is recovering from the consequences of the corona pandemic, with force. How severe these consequences will be depends on the further development of the conflict, on the effects of the current sanctions and on possible further measures, said the ECB President.
For the time being, nothing will change when it comes to interest rates: the key interest rate in the euro zone will remain at the record low of 0.0 percent it has been at for six years. If banks park funds at the ECB, they have to pay 0.5 percent interest. The central bank has decided that it will only raise interest rates again when it is no longer investing fresh money in the purchase of state and company securities.
“Don’t hesitate any longer”
“Even if the ECB is reducing its bond purchases more quickly than recently planned, it must not hesitate any longer when it comes to key interest rates. It must end the negative interest rate policy this year,” said Christian Ossig, Managing Director of the Association of German Banks, in response to the ECB meeting.
Source: Nachrichten
