Monetary policy
Bankers call for ECB response to inflation
Due to the high inflation, there are calls for an end to the ECB’s loose monetary policy. Photo: Boris Roessler / dpa
© dpa-infocom GmbH
Inflation rises and rises – but the ECB has not yet countered it. Is the ECB even fueling inflation with cheap money? The calls for an end to the loose monetary policy are growing louder.
In view of the steep rise in inflation rates, there are increasing calls for an end to the European Central Bank’s glut of money in the financial sector.
“The supposed panacea in recent years – low interest rates with supposedly stable prices – has lost its effect, because now we are struggling with their side effects,” said Deutsche Bank boss Christian Sewing on Monday at the start of Euro Finance Week in Frankfurt. Monetary policy must take countermeasures – “sooner rather than later,” warned Sewing, who is also President of the Association of German Banks.
Lagarde dampens expectations
ECB President Christine Lagarde meanwhile again dampened expectations of the central bank to change course. It is very unlikely that the conditions for an interest rate hike in the coming year will be met, said Lagarde in the Economic Committee of the European Parliament. The central bank continues to assume that inflation will weaken in the coming year. However, this will proceed more slowly than expected. At the same time, economic growth is slowing down somewhat due to supply bottlenecks and the rise in energy prices.
Cornelius Riese, co-head of the leading cooperative institute DZ Bank, recalled at the Frankfurt conference that the ECB had warned of deflation in recent years in view of the comparatively low inflation rates at the time, i.e. a decline in prices on a broad front as a risk to the economy. “For me the question arises: Where is the awareness of the problem, the ECB’s communicated awareness of the problem, what is analog, what is synchronous with the topic of inflation?” Said Riese.
Record inflation
The inflation rates in Germany and the euro area have been climbing for months. In Germany, for example, consumer prices in October were 4.5 percent above the level of the same month last year. Inflation is as high as it was 28 years ago.
In the euro area, too, the inflation rate of 4.1 percent in October was well above the medium-term target of 2 percent set by the ECB. Lagarde reiterated: “Overall, we continue to assume that inflation will remain below our new symmetrical 2 percent target in the medium term.”
The ECB explains the increase largely with special factors such as the recovery in oil prices after the corona shock and delivery bottlenecks as a result of increased demand. In addition, the withdrawal of the temporary VAT cut is having an impact in Europe’s largest economy, Germany.
But a number of economists and bankers warn against underestimating the development. “We also see that the subject of inflation is not quite as temporary as it may be postulated from political circles,” said the new head of HSBC Germany, Nicolo Salsano in Frankfurt.
Sewing affirmed: “And personally, with a view to the stability of the monetary value, what I hear in conversations with our customers makes me skeptical. They are all preparing for the fact that the high inflation rates will last longer. And we know what that means: if inflation expectations rise, then inflation will usually rise at some point – and in the longer term. “
Accusation: The ECB’s monetary policy is fueling inflation
Critics accuse the ECB of using the cheap money to fuel inflation, which it actually wants to keep in check. On December 16, the Governing Council of the ECB wants to decide how to proceed with the multi-billion dollar bond purchases by the central bank. According to current planning, the PEPP (Pandemic Emergency Purchase Program) purchase program launched to cushion the corona shock should run until at least the end of March 2022.
Lagarde had said after the most recent ECB meeting at the end of October that she expected the PEPP to end in March. However, the central bank wants to reinvest money from expiring securities of the 1.85 trillion euro program afterwards. In addition, there is sympathy in the Governing Council for the idea of transferring the flexibility of the emergency purchase program to other bond purchase programs.
Sewing warned: “The longer the central banks do not take countermeasures, the more difficult it will be to cure the consequences of this ultra-loose monetary policy.” Frankfurt economics professor Volker Wieland, member of the Advisory Council for the Assessment of Macroeconomic Development (Economy), dampened expectations with regard to the interest rate environment: “The risk is perhaps greater that the ECB would rather wait too long than too short.”