Frankfurt am Main The end of ultra-loose monetary policy in the euro area, which has been extremely loose for years, is drawing near. The European Central Bank is gradually changing course. However, savers will have to wait until interest rates rise again.
Despite new risks to the economy, Europe’s currency regulators are heading towards an end to their ultra-loose monetary policy.
The European Central Bank (ECB) is cutting back on its multibillion-dollar bond purchases ahead of schedule and has announced that they will end in the summer. On Thursday, however, the Frankfurt central bank left it open when interest rates in the euro zone will rise again after years of record lows.
With its decisions, the Governing Council of the ECB reacted to persistently high inflation, which is being further fueled by the war in Ukraine. In view of the new uncertainties for the economy, several economists expected the ECB to wait and see.
The ECB follows the US Fed and the Bank of England
“It would not have been the right response to make an uncertain situation even more uncertain,” said ECB President Christine Lagarde, explaining the central bank’s course. “We are not talking about acceleration, we are talking about normalization.” The ECB thus follows other major central banks such as the US Fed and the Bank of England, which have already tightened their monetary policy again.
The fact that inflation remains more stubbornly high than feared has also raised concerns among euro watchdogs in recent weeks. In Germany, the annual inflation rate rose again above the five percent mark to 5.1 percent in February. In the euro zone, consumer prices in February were 5.8 percent higher than in the same month last year.
For the current year, the ECB now anticipates an inflation rate of 5.1 percent in the 19-country currency area, so in 2023 inflation should drop significantly to 2.1 percent. In the medium term, the ECB is aiming for a stable common currency with a 2 percent price increase. Higher inflation rates reduce the purchasing power of consumers. So you can afford less for a euro. Critics have long accused the ECB of fueling inflation with its avalanche of cheap money.
The ECB now wants to double monthly bond purchases as part of the PPP program to EUR40bn in April. The central bank plans to invest €30 billion in May and €20 billion in June. In the third quarter, new purchases of securities could end entirely, depending on the situation. Initially, the ECB did not want to reduce the volume of APP purchases to €20 billion again until October 2022.
“Overall, today’s decisions are a good compromise that preserves a high degree of flexibility with a very gradual normalization of monetary policy,” ING Germany Chief Economist Carsten Brzeski summed up. “A first rate hike before the end of the year is still possible.”
Commerzbank chief economist Jörg Krämer described the prospect of ending new bond buying in the third quarter as “a first step towards normalizing very loose monetary policy. But there is still a long way to go before the first rate hike.”
Christian Ossig, General Manager of the Association of German Banks (BdB), demanded: “Even if the European Central Bank is cutting its bond purchases faster than recently planned: it should not hesitate any longer when it comes to key interest rates. It must end the policy of negative interest rates this year”.
However, the outlook for the economy has been cloudy. Russia’s war against Ukraine is also taking a toll on Europe’s economy, which is currently recovering from the fallout from the coronavirus pandemic. In its latest forecast, the ECB predicts economic growth of 3.7 percent in the current year. In December, the central bank still expected a 4.2 percent rise. In 2023, the gross domestic product (GDP) of the euro area will increase by 2.8%.
The ECB has already decided that it will only raise interest rates again after it has stopped pouring fresh money into buying government and corporate securities. For now, the key interest rate in the euro zone will remain at a record low of zero percent, where it has been for six years. If banks park funds with the ECB, they still have to pay 0.5 percent interest.
“Changes to key ECB interest rates will be made some time after the end of Governing Council net purchases under the APP,” the central bank said. Lagarde reiterated: “We want to have as many options as possible, we realize there is a lot of uncertainty.”
The ECB had already decided in December that it would only buy additional securities until the end of March 2022 as part of its PEPP bond purchase program launched during the corona pandemic. However, the central bank wants to reinvest funds from PEPP papers maturing at least by the end of 2024, and funds from PPP papers maturing will also be reinvested “over a longer period of time.” The ECB’s bond purchases help states and companies: they don’t have to offer such high interest rates on their securities if a central bank appears to be a big buyer in the market.
© dpa-infocom, dpa:220310-99-457001/8