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Good economy: Rising inflation: ECB curbs bond purchases

In view of the well-running economy, the ECB is slightly off the gas. In the next few months, the central bank will be pumping a little less money into the markets by buying securities.

Europe’s monetary watchdogs easily put the brakes on their billion dollar bond purchases. However, this does not end the emergency purchase program PEPP launched during the pandemic.

On this question, the President of the European Central Bank (ECB), Christine Lagarde, put the markets off on Thursday for the last meeting of the Governing Council of this year on December 16: “We will talk about the terms and conditions of PEPP in December. »

It was unanimously decided that securities purchases under the Pandemic Emergency Purchase Program (PEPP) will be “moderately reduced” in the fourth quarter of the current year. Most recently, the ECB put around 80 billion euros a month in government and corporate bonds. The ECB did not name a sum for the next few months.

“We are clearly seeing improvements on many fronts,” said Lagarde in Frankfurt. The recovery of the economy in the euro area from the Corona low is progressing. For the current year, the central bank now expects growth of 5.0 (June forecast: 4.6) percent, and then 4.6 (4.7) percent in 2022. But it will take a while before the damage caused by the pandemic is repaired, said Lagarde.

The ECB confirmed that it intends to buy government and corporate bonds until at least the end of March 2022 as part of its particularly flexible emergency purchase program in order to support the upswing. The PEPP has a total volume of 1.85 trillion euros.

The ECB’s bond purchases help states and companies alike: They don’t have to offer such high interest rates for their securities if a central bank is a big buyer in the market. This is particularly important for states that have launched aid programs worth billions to cushion the economic consequences of the pandemic.

“It is good that the ECB Council is moving and taking a very first triple step on the long road to an end to the bond purchases,” commented economist Friedrich Heinemann from ZEW – Leibniz Center for European Economic Research. In the next few months, however, “further clear announcements for an exit from the crisis policy would have to follow,” demanded Heinemann.

Andreas Bley, chief economist of the Federal Association of German Volksbanks and Raiffeisenbanks (BVR), warned: “The ECB should prepare early for a change of course away from the extremely expansionary monetary policy, because the braking distance is likely to extend over a long period in view of the extensive bond purchases. »

So far, however, there is no end in sight to the low interest rates in the euro area. The ECB is still keeping the key interest rate in the euro area at the record low of zero percent. The interest rate has been at this level since March 2016. Commercial banks still have to pay 0.5 percent interest when they park money at the central bank.

Critics accuse the ECB of using all the cheap money to fuel inflation, which it actually wants to keep in check. The central bank’s primary goal is stable prices. Higher inflation weakens the purchasing power of consumers because they can then buy less for one euro than before.

According to the latest estimates by the central bank, inflation in the euro zone is likely to be 2.2 (June forecast: 1.9) percent this year. For 2022, the monetary authorities expect an annual price increase of 1.7 (1.5) percent.

The ECB has given itself more flexibility in dealing with higher inflation rates: The central bank has recently been aiming for an annual inflation rate of two percent for the currency area of ​​the 19 countries and is at least temporarily ready to accept a moderate increase or decrease in this mark.

In August 2021 consumer prices in the euro area were 3.0 percent above the level of the same month last year – the highest level in almost ten years. The ECB does not want to raise interest rates again until it sees its inflation target achieved in the long term.

Bundesbank President Jens Weidmann had warned not to ignore “the risk of inflation being too high”: “In view of the existing uncertainty, we should not lock in the very loose course of monetary policy for too long.”

Marcel Fratzscher, President of the German Institute for Economic Research (DIW), said on Thursday: “The ECB rightly signals that it will secure all the freedom and flexibility for its further monetary policy in the coming years. Economic development and inflation are still not strong enough for an end to the expansionary monetary policy. “

From the point of view of the ECB, the increase in consumer prices is temporary and due to special factors as a result of the Corona crisis. For example, crude oil prices collapsed due to low demand on the world market after the outbreak of the pandemic in spring 2020. They have since recovered. The return to the usual VAT rates in Europe’s largest economy, Germany, on January 1, 2021 also had an effect on inflation in the euro area.

Greenpeace used the ECB meeting to call for more action from the central bank in the fight against climate change with an action in front of the ECB headquarters in Frankfurt.

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