Faster end of cheap money? Puzzling U-turn by the ECB

by time news

WIf you want to know how the financial markets feel about the latest messages from the European Central Bank (ECB), you only have to look at the euro exchange rate. After the statement from the Governing Council was published, the common currency initially shot up to $ 1.1120.

The central bank announced that the bond purchases would be completed faster than previously thought. The instrument, which has been used for years, could be mothballed as early as the third quarter. This decision came as a complete surprise to the financial markets. In view of the war in Ukraine, no one had expected that the ECB would tighten its monetary policy course in this situation of all things – because that is what the faster end of bond purchases is headed for.

In the run-up to the meeting, a large number of observers had expected that the ECB would postpone the beginning of the end of cheap money, which it had cautiously announced in February.

also read

But when ECB President Christine Lagarde emphasized several times in the subsequent press conference that the new schedule for the end of bond purchases was by no means an acceleration of the exit, investors on the markets reacted in confusion. The euro promptly gave back its gains and even fell below the EUR 1.10 mark. The zigzag course of the euro is almost symbolic of the hesitant course of the central bank.

It was also striking how serious and tight-lipped the ECB President was at this press conference. There was little trace of the French woman’s other charm, instead Lagarde, a button with the colors of the Ukrainian flag on her lapel, answered the questions asked with a serious expression and even ended the press conference a few minutes early – which is particularly important given the difficult overall situation seemed unusual.

Source: Infographic WORLD

After all, the combination of pandemic, inflation and war on the European continent is currently causing a particularly high need for speech: Uncertainty is high and the central bank of the euro area is particularly in demand as a strong managerial authority in this situation.

It was also irritating that the Council does not appear to be closed in the current difficult situation. In her replies, the ECB President repeatedly emphasized the intensive internal discussion. Some members had advocated maintaining the current monetary policy, others wanted to continue with the normalization of monetary policy despite the war.

also read

Two workers on a gas pipeline in western Ukraine

Statement on state television

At times it almost seemed as if Lagarde had not been able to adequately manage the internal twist. This is in stark contrast to her predecessor Mario Draghi, who in the emergency of 2012 even set the course of monetary policy on his own with his famous “Whatever it takes”.

At the moment, the central question revolves around what the ECB is actually more worried about: the rapidly rising inflation or the growing fears of a recession, both fueled by the war in Ukraine? The central bank basically left it open. It is true that it is reducing its bond purchases faster than expected, which has led to severe turbulence in Italian bonds on the bond market. The yield on ten-year Italian bonds jumped more than 0.2 percentage points to around 1.9 percent.

also read

Electricity, gas and oil are becoming more and more expensive and driving up consumer prices

At the same time, however, the ECB economists’ inflation forecast for 2023 and 2024 is remarkably low. The forecast is for 2.1 percent in 2023 and 1.9 percent in 2024. For the current year, however, economists have almost doubled their forecast to 5.1 percent. Apparently, these values ​​don’t quite fit together, because it remains unclear how inflation will fall below the target of two percent again so quickly.

“These are fateful months for the ECB,” says Thomas Gitzel, chief economist at VP Bank. “The energy price shock will push inflation rates to new heights. The European monetary authorities run the risk of making a historic mistake if they handle monetary policy too loosely.”

Source: Infographic WORLD

Lagarde agrees: “Europe is at a turning point,” she said with an unusually serious expression at the beginning of the hour-long press conference. “We will do whatever is necessary to maintain our mandate of price stability and financial stability in these times,” said the currency guardian combatively.

The ECB now intends to significantly reduce the pace of its bond purchases in the coming months. In April, bonds with a volume of EUR 40 billion are to be bought, this number is to be reduced to EUR 30 billion in May and EUR 20 billion in June and finally to expire in the third quarter. “We are not talking about accelerating our course or tightening monetary policy, but about normalizing monetary policy,” emphasized Lagarde several times.

Source: Infographic WORLD

However, there is one important condition: the ECB will end its asset purchases if inflation and growth turn out as projected in the main scenario. “Of course, if the data doesn’t support our assumption, then we’ll have to revise our timeline and volume of bond purchases,” Lagarde said.

The central bank is thus still keeping a door open to be able to continue buying bonds if growth should decline significantly more than expected or the inflation rate should develop differently than expected.

also read

Joe Biden is taking a high political risk with his announcement

A tweet by former ECB Council member Vitor Constancio made it clear that even seasoned central bankers are puzzled about the outcome of the council meeting and Lagarde’s appearance. “In my view, these changes were unnecessary,” he wrote after the performance, also referring to the surprised financial markets.

You can listen to our WELT podcasts here

We use the player from the provider Podigee for our WELT podcasts. In order for you to be able to see the podcast player and to interact with or display content from Podigee and other social networks, we need your consent.

I consent to content from social networks being displayed to me. This allows personal data to be transmitted to third parties. This may require the storage of cookies on your device. You can find more information about this.

“Everything on shares” is the daily stock exchange shot from the WELT business editorial team. Every morning from 7 a.m. with our financial journalists. For stock market experts and beginners. Subscribe to the podcast at Spotify, Apple Podcast, Amazon Music and Deezer. Or directly by RSS-Feed.

You may also like

Leave a Comment