Christine Lagarde stays on course. The President of the European Central Bank (ECB) is not raising interest rates. Many Germans can hardly believe this: Inflation in the euro zone has reached a record level – and the ECB is doing nothing? This criticism is unfair and wrong. The fact that the Governing Council of the ECB is acting prudently, on the other hand, is exactly right.
Anything is happening right now that gets central bankers’ pulses racing. Prices are rising faster than they have been in decades. Inflation is more than seven percent. And now Russia’s war in Ukraine is severely slowing down the post-pandemic economic recovery. Perhaps the next recession is imminent. In times of crisis, central bankers don’t actually want to raise key interest rates because every quarter of a percentage point that interest rates rise further slows down the economy – a dilemma, especially now.
Nevertheless, interest rates in Europe will probably rise again, indeed have to rise. ECB President Lagarde knows that too. On the Central Bank Easter meeting she emphasized that the ECB is expected to end its bond purchases in the summer. With these bond purchases, the ECB is putting many billions of euros into the economic cycle, and it is already stopping bit by bit. Only when it stops buying bonds at all are interest rate hikes even possible.
In the technical language of monetary policy, by pointing to the end date of bond purchases, Lagarde sent a strong signal, which translates to: A rate hike could very well come later this year. So it is by no means the case that the ECB is doing nothing at all, as some critics claim. It is already exiting the looser monetary policy and holding out the prospect of interest rate hikes.
Some are calling for more speed from the ECB. But it seems right to hold off on interest rate hikes for a while. If the Russian shock turns into a major energy economic crisis for the European economy, the ECB will have to reassess the situation.
The ECB must not wait until inflation becomes uncontrollable. But she doesn’t do that either. If prices slide across the board, the situation becomes dangerous. But that is not yet reflected in the economic data. At the moment it is still above all the energy costs, which have been driven up to such high levels by the war, that are causing inflation to pick up. Wages, on the other hand, are not increasing like crazy. Workers probably don’t like that, but it’s good news for controlling inflation. And if the data changes, the ECB will change its mind and act faster.
But in the US, isn’t the Fed raising interest rates much more boldly? It is true that the Federal Reserve is acting much more tightly. But the economy there demands exactly that. The corona aid packages in the USA were larger than in the euro zone, the US economy is already running hot again. Americans have a lot more money on their hands than Europeans – and spend it with both hands. That drives inflation quite differently than this side of the Atlantic. The ECB must therefore not simply copy the Fed. Christine Lagarde must chart her own course.