The ECB is keeping the money locks open, maintaining a high pace of asset purchases and assuring the financial markets that a turnaround in interest rates is not in sight. But behind the scenes there is a rumble.
By Klaus-Rainer Jackisch, Mr It is still a bit strange for ECB President Christine Lagarde, the new setup at the press conferences, which premiered in March. For around 22 years, the President, Vice-President and ECB spokesman sat behind a long podium table to inform the public about the latest decisions after the Council meeting. However, because the central bank wants to be fresher, more modern and more oriented towards the population, the information is now available behind standing desks on stylish steps in high-gloss white.
Economic situation “not significantly changed”
Modern chic, which cannot hide the fact that the majority in the ECB Council remains true to its monetary policy: After the speed of the bond purchase program from the Corona emergency program PEPP was accelerated in March, the tense-looking ECB President tried hard today, always to emphasize again that the ultra-loose monetary policy will continue in full swing and at an accelerated pace. Because “the economic outlook remains gloomy,” said Lagarde. There are slight signs of recovery. Overall, “the economic situation in the euro area has not changed significantly.” Accordingly, as expected, key interest rates remained at the record low of zero percent. The core of the PEPP is the massive bond purchases: the central bank wants to pump 1.85 trillion euros into the markets by the end of March next year by purchasing bonds of all kinds. More than half has already been spent. If the accelerated pace of purchases remains, the fixed volume will be reached much sooner. Therefore the question arises: What comes after?
Will the interest rate turnaround come in June?
For some time now, the “hawks” in the Governing Council, that is, the representatives of a tight monetary policy, have been sniffing their chance to set the course for the beginning of the turnaround. At the current council meeting yesterday and today they still kept their feet still. But the pressure should increase by the next meeting in June at the latest. Then there is new economic data from the ECB. The “hawks” hope that the first vaccination successes in some euro countries and significantly improved economic prospects will pave the way for markets and the population to get in the mood for a normalization of monetary policy. Strong supporters are the Dutch central bank chief Klaas Knot, who wants to reduce bond purchases as early as the next quarter. His Belgian colleague Pierre Wunsch and, of course, Bundesbank President Jens Weidmann are going in a similar direction. Your convincing argument: The financial markets must slowly be adjusted to the turnaround in monetary policy. If the swing comes too abruptly, the unrest is too great, and serious upheavals could occur, especially on the stock markets, which nobody wants. The significantly increasing inflation in the euro area also offers the justification for the monetary authorities to act. In March, the inflation rate in the euro area was 1.3 percent, after it was minus 0.3 percent in December.
The stock exchanges react sensitively
The ECB President had to experience just a few weeks ago how fragile the mood on the stock markets is. Given the sharp rise in inflation rates, yields rose on the bond markets because investors expected the central banks to tighten their reins – a diabolical development from the point of view of investors on the stock market, who reacted very coldly. An extremely nervous Lagarde therefore assured after the March conference that a change in monetary policy was not imminent – and received flanking support from the entire Board of Directors, which never tired of insuring more or less the same thing. The US and UK also joined the ECB; there the central banks struck in the same vein and thus again ensured calm and rising prices on the stock markets. But now the international unity is beginning to crack: yesterday the central bank of Canada decided as the first leading central bank in the world to reduce its bond purchases. From Monday, the monetary authorities there will only buy government bonds in a volume of three billion Canadian dollars per week, they said in Ottawa. So far it has been four billion. The low key interest rate, however, remains unchanged at 0.25 percent. The reduction in Canadian bond purchases was received with great surprise in the financial markets. It is possible because the economic outlook has improved significantly in view of the major vaccination successes in the North American country and the recovery on the labor market is also making great strides.
The “hawks” are still in the minority
But the “doves” in the Governing Council – and thus the vast majority in the body – are not even thinking of following this example. Lagarde made this very clear today: “We did not discuss plans in the Governing Council to phase out the PEPP program,” said the President. “That would also be completely premature.” A clear hint to the “hawks” not to be too hasty. Because because of the messed up vaccination campaign of the EU, the economic recovery in the euro area is much lower and is dragging on like chewing gum. Compared to the major economies in the USA and China, the data and economic conditions in the euro zone are more than disappointing – especially since the third corona wave has the old continent firmly under control and there is currently no sign of improvement. So all eyes are already now on the coming ECB meeting in June. It should be decisive for the further course of action. Then it will show whether the economy is still so weak that the monetary authorities may even spice up their PEPP program a second time because the funds planned so far are insufficient – or whether the economic forecasts are so promising that the “hawks” will last can finally initiate the long-awaited turnaround in monetary policy.
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