Sent April 14, 2022, 6:15 am
What had the ECB decided in its last meeting?
Between the urgency to tackle runaway inflation and fear of the impact of the war in Ukraine on growth, the European Central Bank appears to have chosen its side in its latest meeting in March. By choosing to speed up the normalization of its monetary policy, to the surprise of observers, the ECB preferred to act to contain inflation.
Despite heated discussions, the “hawks”, proponents of a rapid monetary tightening, have taken over the “doves”, who fear that the end of monetary support weighs down growth weakened by the Russian invasion of Ukraine. “A large number of members considered that the current high level of inflation and its persistence required immediate measures for the normalization of monetary policy”, testify the minutes (the minutes of discussions) of the last meeting.
At the end of March, the ECB terminated its “pandemic emergency” asset purchase program (PEPP) as planned. To partially compensate for the disappearance of approximately 60 billion euros of monthly purchases that the PEPP had managed to reach, the monthly allocation of the classic program (APP) will double, to 40 billion euros in April, and then rise to 30 billion euros. May and 20 billion in June. The institute was careful not to go any further, saying only that the first rate hike would come “some time later”.
What has happened since then?
Since then, inflation in the euro area has started to rise again, reaching its highest level since the creation of the single currency with 7.5% in March, a long way off the ECB’s medium-term target of 2%. And the European institution is so far the most wait-and-see of the main central banks.
Government borrowing rates have risen everywhere, driven by inflation and the prospect of a rapid Fed tightening of monetary policy. Announced long ago, the US central bank’s (Fed) first hike by a quarter point percentage (0.25%) in March, will be followed by many more. And the Fed will not hesitate to double the intensity of its future tightening.
“Many participants pointed out that one or more increases of 50 basis points [un demi-point de pourcentage, NDLR] […] it may be appropriate in future meetings, particularly if inflationary pressures remain high or intensify, “reveal the minutes of the latest meeting of the US institution last week.
What should we expect from this meeting?
Markets now take for granted two ECB rate hikes this year, before others in 2023. Prices, due to the surge in energy prices, were largely out of the control of the ECB, the Bank. central cannot stand by, investors believe. However, according to analysts, important decisions should wait a little longer.
“The ECB is not expected to commit in advance to a more specific path to normalizing its policy this Thursday,” Frederik Ducrozet told Pictet. “Christine Lagarde could hint at a (conditional) end to APP purchases in June, opening up the possibility of a first rate hike in September,” he adds, stating that she doesn’t see clearly what she would get that clarification.
The vagueness should therefore remain in order to maintain a large enough room for maneuver on the sequence of events. The central bank could take this opportunity to refute or validate rumors about a new tool under development. This would have the purpose of combating a possible fragmentation of financing conditions. In other words, an unjustified rise in the rates of one or more European states, which could prevent the correct transmission of its monetary policy throughout the euro area.
It is therefore the June meeting, which will be held in the light of the new economic data, which should be decisive. But the press conference that President Christine Lagarde will hold this Thursday afternoon will be closely watched for any signs of an even more aggressive turn on inflation.