European Central Bank Update

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“Either go big or go home” is Christine Lagarde’s favorite description of the European Central Bank’s response to the economic carnage caused by the pandemic.

European economy now rebound From the beginning of the Covid-19 crisis, the challenge for the ECB president is how the central bank should relax its large-scale monetary stimulus without shortening the recovery or frightening the bond market, especially for southern European borrowers.

This delicate task has exacerbated divisions within the European Central Bank, and economists are expected to have a preliminary understanding of how it might end its 1.85 ton Pandemic Emergency Purchase Program (PEPP) on Thursday, which is its flagship bond purchase policy to protect finances The market is protected from shocks. crisis.

Although investors expect Lagarde to announce dial Economists said that when buying PEPP, the bigger problem facing the central bank is inflation. This is largely due to commodity shortages and a rebound in demand, which rose to the highest level in a decade.

Silvia Ardagna, chief European economist at Barclays, said: “From a macroeconomic point of view, it doesn’t matter whether they increase from buying 80 billion euros of PEPP a month to 70 billion euros or 60 billion euros.” “The key issue is PEPP. What will happen to the asset purchase after it is over… and their expectations of inflation.”

The possibility of rampant inflation is exacerbating tensions between the conservative “hawks” of the ECB’s Governing Council and more “doves” who want to maintain massive stimulus to support the recovery.

In the past 18 months, hawks such as Jens Weidmann in Germany, Klaas Knot in the Netherlands, and Robert Holzman in Austria have firmly supported the European Central Bank’s crisis response measures.

But since Eurozone GDP, they have become more outspoken Expanded by 2% In the second quarter, it surpassed China and the United States for the first time since the outbreak.Inflation has risen to Ten years of high level It was 3% in August, well above the European Central Bank’s 2% target.

Hawks worry that inflation will continue to exceed expectations, driven by supply chain bottlenecks, demand recovery, and excess savings accumulated by household spending during the pandemic. They worry that if the European Central Bank reacts too slowly, it will have to tighten policy suddenly to prevent the economy from overheating.

“Risks are currently biased upwards,” warned Weidmann, the governor of the Bundesbank. A speech last week. “If these temporary factors lead to higher inflation expectations and accelerated wage growth, then in the long run, the inflation rate may rise significantly.”

The European Central Bank will release its latest forecast on Thursday. Most analysts expect it to raise their inflation forecasts for this year and the next few years, although they also expect inflation to fall sharply next year and stay below the ECB’s target throughout 2023.

Katharina Utermöhl, a senior economist at Allianz, said that if calculated on a two-year average, the recent surge in inflation in the euro zone looks more modest, reducing it to less than 1.5%. She added: “Reinflation is not inflation-pay attention to the fundamental effect of the roller coaster.”

The economist added that although the Verdi trade union in Germany recently asked for a 5% salary increase for 1.1 million public sector workers, there is little sign that inflation is pushing up wages. Bars and restaurants Employees in Paris and Berlin have also increased their salaries for filling vacancies.

Morgan Stanley European Economics Director Jacob Nell said: “At present, wage data remains stable, and there is a disconnect between some higher wage requirements and anecdotal evidence of some employee shortages.”

Debate on the issue The trajectory of inflation The other big question that is crucial to the decision hanging over the European Central Bank is how much stimulus measures will be injected into the economy through the purchase of bonds when the PEPP ends next year.

Although other major central banks, such as the Federal Reserve and the Bank of England, are preparing to “shrink” their asset purchases to zero, but the European Central Bank will continue to purchase bonds through its traditional purchase program. This is still 20 billion euros per month and is expected to double or triple by the end of PEPP.

It’s unlikely to decide the size of the boost before December, but a more controversial issue is Extra flexibility The PEPP will be transferred to the European Central Bank’s ongoing asset purchase program.

This flexibility will allow the European Central Bank to exceed its own limit of holding more than one third of qualified bonds of any country, which is close to achieving this in Germany and the Netherlands.

So far, governments have been able to substantially increase debt levels without worrying too much about costs. But if the European Central Bank’s firepower to buy more bonds is limited, investor anxiety may push up yields.

At the same time, hawks worry that raising the sovereign bond purchase limit will expose the European Central Bank to allegations of violating the EU’s ban on government currency financing. Partial support It was tried by the German Constitutional Court last year.

“This is the key discussion they are going on: not whether to strengthen their ongoing asset purchase plan to comply with PEPP, but how much flexibility there will be,” BNP Paribas senior European economist Spyros Andre Opoulos Express.