Mhe meeting of the central bankers in Jackson Hole, USA, is being watched tense on the financial markets. Jerome Powell, the head of the US Federal Reserve, wants to give his assessment of the situation in the United States. This could provide new indications of how different the monetary policy of the central banks in America and Europe is likely to develop from now on – with considerable effects on the financial markets as well. “It is now clear: America will get out of the ultra-loose monetary policy faster than Europe,” said Jari Stehn, European chief economist at the investment bank Goldman Sachs, in an interview with the FAZ The European Central Bank, on the other hand, is unlikely to raise its key interest rates until 2025 at the earliest.
The Fed will also stop its bond purchases faster than the ECB, says Stehn. “We expect the Fed to decide in November to start tapering, that is, to exit from bond purchases.” In December, it will be so far that the central bank will buy fewer securities. Bond purchases in America are likely to stop at the end of the third quarter of next year – in Europe, on the other hand, the ECB will continue its corona crisis program PEPP until at least March next year and will continue to purchase securities with the longer-term purchase program APP until mid-2023.
Three options for the ECB
The Goldman economist thinks that the first steps in America would not yet put the ECB under pressure. “For the ECB, it is irrelevant if America marches ahead of time when it comes to exiting its loose monetary policy,” says Stehn. “Europe entered the corona crisis with a lower capacity utilization – and the United States is already further in the economic cycle.”
At least Goldman expects ECB President Christine Lagarde to reduce the pace of her bond purchases soon. “We expect that the ECB will slow down the pace of its bond purchases under the PEPP crisis program in the fourth quarter of this year.”
“That will be a signal that monetary policy is slowly leaving crisis mode,” said Stehn. “But what the central bank does after the PEPP crisis program expires next spring will be more decisive.” Billions of euros a month after the longer-term purchase program APP will buy. “In my opinion, there will be a transitional arrangement,” said Stehn. “Either the ECB is temporarily increasing the APP’s monthly bond purchases, or it is introducing a new program for the transitional period – or it is extending the crisis program a little bit.” so to speak”.
Impact on Bond Yields
The transatlantic divergence in monetary policy will have a significant impact on the financial markets. “Bond yields will rise globally as the year progresses – but will remain significantly lower in Europe than in the United States,” says Stehn. Economic growth in Europe should have already peaked, he believes: “However, we continue to expect constructive economic growth for the second half of the year; there will be a slight slowdown at a high level.”
In contrast, inflation in Germany has not yet reached its turning point. “Inflation in Germany will continue to rise in the short term – but not permanently,” said Stehn. For November he expects an inflation rate in Germany according to the Harmonized Consumer Price Index of 4.4 percent. In the next year, inflation will then fall again because many special effects related to the corona pandemic expired. “There is a relatively high probability that inflation will fall again next year – there is more uncertainty about how deep it can then fall,” says Stehn. He reckons with 1.5 percent inflation for the euro zone by the end of 2024. “From the point of view of the ECB, with its target of 2 percent, inflation will tend to be too low, not too high,” says Stehn.
Even if producer prices in Germany rose as sharply in July as they did in the 1975 oil crisis, he would not compare the situation today with that of then, says Stehn. “It is the special effects of the corona pandemic that are now leading to such high inflation rates. That is not comparable to the wage-price spiral of the seventies. ”The wages in Europe developed very moderately. “With the reopening of the economy, demand rises sharply, supply still needs a little – that is currently driving prices up.” It was certainly quite surprising for many forecasters that inflation has now risen noticeably for the first time in a long time. admits the economist: “But of course the whole pandemic came as a surprise.”