No turnaround in interest rates in sight: The ECB’s dangerous procrastination

Status: 03.02.2022 3:36 p.m

Despite record-high inflation, the ECB left the key interest rate in the euro zone at a record-low zero percent. The turnaround in interest rates is a long way off. What are the currency watchdogs afraid of?

By Angela Göpfert,

The European Central Bank (ECB) continues to shy away from initiating a monetary policy change of course. Despite persistently high inflationary pressures in the euro zone, it is keeping its feet still. At today’s ECB Council meeting, the monetary watchdogs left the key interest rate in the euro area at a record low of zero percent.

Lagarde bets on lower inflation over the course of the year

The ECB is also undeterred in its multi-billion dollar bond purchases. The central bankers again did not want to announce an end to the asset purchase program (APP).

At the press conference that followed, ECB President Christine Lagarde said the Council was “unanimously concerned” about the inflation data. However, the Council agreed not to make any decision without a sufficient data basis. The ECB economists do not want to present new projections for inflation until March. “Inflation is likely to remain elevated for longer than previously thought, but will moderate over the course of this year,” said the Frenchwoman.

Record high inflation rate – so what?

Lagarde continues to bury its head in the sand in the face of rapidly rising consumer prices in the EU. She is sticking to her narrative that the sharp rise in inflation rates is only a temporary phenomenon.

This view had recently been questioned by many economists. Bundesbank President Joachim Nagel, who has been in office since the beginning of the year, also warned when he took office that he “currently sees the risk that the inflation rate could remain elevated for longer than currently expected”.

Just yesterday, the statistics office Eurostat reported a surprising increase in the inflation rate in the euro area in January to a new high of 5.1 percent. This puts the inflation rate around two and a half as high as the ECB’s target of two percent.

Harsh criticism of loose monetary policy

No wonder that today’s ECB decisions are harshly criticized by some economists. Friedrich Heinemann from the Leibniz Center for European Economic Research (ZEW) found the words particularly clear: “The Governing Council is now risking seriously damaging the reputation of this institution.”

The accusation is that the ECB, by sticking to an ultra-loose course in the face of persistent inflation, has lost sight of the goal of price stability in favor of the easy financing of high government deficits.

No confidence in the EU economy?

With its dithering and hesitation, the ECB is sending a possibly fatal signal to the markets: Postponing the turnaround in interest rates is evidence of the central bankers’ lack of confidence in the strength of the European economy. Apparently, the ECB does not trust either the economies of the euro zone or the financial markets to be able to cope with an interest rate turnaround any time soon.

The US Federal Reserve (Fed) has shown how to carefully prepare the markets for an interest rate turnaround. So far, the tightening of monetary policy by the central bankers led by Jerome Powell has been accepted by the markets without any major upheaval.

Fed and Bank of England move forward

In contrast to the ECB, the Fed has long corrected its original assessment that the high inflation rates are only a temporary phenomenon. It has been reducing its bond purchases since January, and the first interest rate hike was promised for March. Market players expect the Fed to raise interest rates five times this year. Bank of America experts even expect seven rate hikes in 2022.

So while the ECB is still hesitating and hesitating, the Fed is pushing ahead briskly on the interest rate path. It is not the only central bank that sees the time to raise interest rates. The Bank of England raised its key interest rate for the second time today to 0.5 percent.

DAX falls to daily low, euro rises

The stricter monetary policy of the Fed and Co puts the ECB under pressure. Experts assume that the ECB will not be able to ignore the global trend towards rising interest rates for much longer. This is also reflected in the foreign exchange market: in a first reaction, the euro falls to a daily low of 1.1272 dollars, but according to the Lagarde statements it turns positive to 1.1391 dollars.

It was not until the end of January that the European common currency had fallen to $1.1122, its lowest level since mid-2020. The DAX comes under pressure after the ECB decision. The German standard values ​​rush below the mark of 15,500 points.

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