Reversal of deferred interest rates: the ECB on the verge of losing control?

Status: 04/14/2022 2:56 p.m.

The ECB left the eurozone key rate at zero percent. A possible interest rate reversal was discussed – but nothing was decided. Is the ECB losing control of inflation?

The euro zone’s key interest rate remains at a historically low level of zero percent. This was decided by the Council of the European Central Bank (ECB) today in Frankfurt, as announced by the central bank. The ECB also confirmed its timetable for ending multi-billion dollar bond purchases under its APP purchase program in the third quarter.

The currency police around Christine Lagarde continue to tighten the reins of monetary policy with extreme caution. Central banks around the world are currently facing rapidly rising rates of inflation; the primary objective of monetary policy, namely monetary stability, is threatened.

The euro falls in first reaction

While the US central bank has already implemented the interest rate hike and the Norwegian central bank raised its key rate for the third time in March to 0.75%, the ECB remains hesitant.

The interest rate differential between the dollar and the euro zone should therefore continue to widen in favor of the dollar for the time being. This is also reflected in the foreign exchange market: after the ECB’s interest rate decision, the euro fell to $1.0888 from $1.0915 previously.

No interest rate recovery in sight – despite record inflation

The inflation rate in the euro zone reached 7.5% in March, its highest level since the introduction of the euro as the currency of settlement in 1999, and thus again clearly exceeded the target of 2 % of the ECB.

But the moment of interest rate reversal is still open after this meeting of the ECB Council. The only thing that is clear is that nothing will happen until the third quarter. Because the currency watchdogs only pledged to raise interest rates after the end of net buying. While the hawks, that is to say the partisans of a tightening of monetary policy, within the Council of the ECB are already pushing for a first hike in interest rates in the third quarter, the more cautious doves in in this respect are only inclined towards a turnaround in interest rates towards the end of the year.

“This wait is risky”

Given the ECB’s hesitant attitude, some economists are already warning that monetary authorities could lose control of the action and lose control of inflation expectations.

“Unfortunately, despite an inflation rate of 7.5%, the ECB has not decided to end its net bond purchases and negative interest rates sooner. This expectation is risky”, warns Jörg Kramer, Chief Economist of Commerzbank. “The longer the ECB sticks to its very accommodative monetary policy, the more people’s inflation expectations rise and very high inflation becomes permanent.”

The fear of the economic slowdown

What makes the ECB’s decision so difficult at first glance: it is not only monetary stability in the eurozone that is at stake, but also the economy. Some economists fear that the ECB could suffocate the economy, reeling from supply bottlenecks and rising energy costs, and plunge the national economies of member countries into recession by raising prices too quickly. interest rate.

But is the ECB really faced with such a big dilemma? ZEW expert Friedrich Heinemann rightly refers to the European treaties: “Here you will find a clear answer as to how the ECB should decide in such a situation: price stability is the main objective, other objectives being subordinate.” Each month of hesitation damages the reputation of this important European institution.

In fact, the legal mandate of the ECB is only to ensure stable prices. In contrast, the US Federal Reserve, for example, also pursues the goal of full employment.

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