Although the inflation rate in the euro zone has recently climbed to its highest level since 2008 at 3.4 percent, the European Central Bank is continuing its loose monetary policy undiminished. On Thursday after the ECB Council meeting, ECB President Christine Lagarde referred to special factors that are responsible for the price increase, such as the sharp rise in oil, gas and electricity prices and production bottlenecks. Therefore, the inflation rate will continue to rise this year. “However, we expect prices to fall again next year,” said Lagarde.
The ECB is under pressure. Many citizens painfully feel the higher prices for these essential expenses, and many foods have also become significantly more expensive. In Germany, the inflation rate in October was 4.5 percent. That is the highest level in 28 years.
Many other central banks see similarly strong price increases in their economic areas. The Bank of England and the American Federal Reserve have therefore already announced that they will tighten their monetary policy; there is an interest rate hike in the room. In both countries, the inflation rate is above four and five percent, respectively.
The monetary policy course of the ECB falls out of line, even if the economic situation in Great Britain and the USA is different. But Lagarde also experiences opposition in-house. Bundesbank President Jens Weidmann has repeatedly pointed out that Europe’s central bank should not underestimate the risk of inflation. Completely surprisingly, he announced his departure last week at the turn of the year. He gave private reasons for this, but between the lines one could read that Weidmann saw no chance of finding a majority in the Governing Council with his arguments. As he said goodbye, he warned that the ECB should “not lose sight of the dangers of inflation”.
The Corona emergency program should run until at least March 2022
Lagarde again expressed her regret over Weidmann’s withdrawal and said that she had always worked well with the Bundesbank chief. “I don’t think his decision is an expression of exhaustion about my management style,” said the ECB President. The monetary policy debate in the Governing Council then only revolved around one topic: “We discussed inflation, inflation, inflation. We know that people in Europe are worried about inflation. But we are convinced that our analysis is correct and prices will fall again. “
Logically, the Governing Council decided to continue the 1.85 trillion euro emergency Corona program until at least March 2022 and to leave the key interest rate at zero percent. The decision on the future of the program is expected for the December meeting, when the central bank has new forecasts for the economy and inflation.
“I warn against playing down the longer-term inflation risks. The ECB is likely to continue to finance a large part of the budget deficits by buying government bonds, which means that too much money gets into circulation,” said Jörg Krämer, chief economist at Commerzbank. Climate policy would also speak for increasing inflation risks. “It is time for the ECB to end its extremely loose monetary policy.”