European Central Bank: Between Crisis Aid and Inflationary Pressure


Status: December 28, 2021 1:41 p.m.

Rising prices have put Europe’s monetary authorities under pressure this year. Critics accuse the ECB of having recognized the extent of inflation too late. How long will the interest rate turnaround be waiting?

By Klaus-Rainer Jackisch, HR

Once again this year, the European Central Bank’s monetary policy played a decisive role in the financial markets and in consumer behavior. Because for the first time in a decade, the European monetary authorities, like their colleagues around the world, were confronted with a significant rise in inflation. While the inflation rate in the euro area was still in the red at 0.3 percent in December 2020, it soared to just under five percent by November of this year – all of this as a result of the strong economic recovery after the collapse caused by the Corona crisis, with a shortage at the same time Raw materials and the resulting rising prices for energy and primary products.

Klaus-Rainer Jackisch

“Dynamics completely underestimated”

But the monetary authorities would have found it difficult to recognize this development, says Carsten Brzeski, Chief Economist Germany at ING Bank. “The monetary policy of the ECB started with a big mistake in 2021, because the inflation dynamics were completely underestimated,” said Brzeski. “The ECB was not so different from other large central banks.” However, other large central banks, especially the US Federal Reserve, understood earlier that inflation was not just a temporal phenomenon, but could be a more structural problem.

While the US Federal Reserve and the British Bank of England have been tightening the reins since the summer at the latest, announcing the reduction in bond purchases and the interest rate turnaround, in the British case also followed through later, the ECB still maintained that the high price increase was only a temporary phenomenon. Throughout the year she continued to print billions of euros, with which she bought bonds and at times even accelerated her aid program.

Bond purchases only throttled

Only after its last council meeting in December did the ECB meekly admit that it had gone too far with its forecasts and that inflation would remain very high in the coming year. But even this realization only leads to a moderate throttling of bond purchases, not to a real change of direction, criticizes Jörg Krämer, chief economist at Commerzbank: “Unlike the Anglo-Saxon central banks, the ECB is ruling out higher key interest rates in the coming year. The European Central Bank is not reacting decisively against it the massive inflation problems that exist not only in the US, but also in the euro area. “

In order to create more leeway for this monetary policy, the central bank even changed its strategy in the summer: instead of just under two percent, the monetary authorities are now aiming for an inflation rate of exactly two percent. The difference, which sounds like academic sophistication, has it all: Because it is difficult to hit exactly the two percent, the ECB allows itself to stay above or below the target for a while in order to achieve it as an average in the medium term.

Klaus-Rainer Jackisch, HR, on the ECB’s interest rate decision

tagesschau24 4:00 p.m., December 16, 2021

More leeway for monetary policy

However, this gives itself more leeway not to have to react immediately to major deviations and can therefore be a good reason why it is sticking to its loose monetary policy. There is also another reason why the ECB wants to keep interest rates close to zero for as long as possible, says Commerzbank chief economist Krämer: “It also looks at the financing conditions, including the financing requests of the many highly indebted countries in the euro area, especially from the south of the Monetary union. In my opinion, that explains why the ECB, unlike the US Federal Reserve, is so indecisive, so half-heartedly about the inflation issue. “

Nevertheless, the monetary authorities cannot resist a turnaround in monetary policy over the long term. Carsten Brzeski believes that the ECB will end its bond purchases in the coming year – and that “from late summer 2022 onwards there will be speculation about when the first rate hike will come”. A real interest rate turnaround by the ECB could then be initiated in the first quarter of 2023.

Consumers must therefore wait at least a year until their savings account pays at least some interest again.


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