After much hesitation and waiting, the ECB is about to herald a turnaround in its monetary policy. At its meeting on Thursday, it is likely to set the markets for rate hikes. But that is nothing more than symbolism. A comment.
The ECB Council meeting on June 9 is likely to be a special one. All the statements made by the euro central bankers in recent weeks indicate that the council will decide to end the bond purchase program and announce that it will raise interest rates at its July meeting. It would be the first increase since 2011.
The latest inflation figures for May underscore why it is high time to end loose monetary policy. Inflation was 8.1 percent last month and the alarming thing is that core inflation has now also reached dangerous levels. In May it was 3.8 percent. Core inflation excludes tobacco, energy and food prices. “The figures suggest that inflation rates are not expected to fall quickly, as inflation has broadened significantly in recent months,” wrote Ulrike Kasten, Europe economist at DWS, in a comment. “The wage increases are still limited. But it is only a matter of time before demands for inflation compensation are reflected in wage agreements.” Rising wage costs could exacerbate the inflation problem if companies raise prices accordingly in return.
However, the ECB seems reluctant to acknowledge the seriousness of the situation. The head of the central bank, Christine Lagarde, recently emphasized that the ECB feels committed to the medium-term rate of inflation. It should be kept at two percent. The dominant hope seems to be that the inflation problem will somehow solve itself once the supply chains relax and demand normalises.
For the time being, the ECB does not see any major need for action in combating the currently high inflation rate. Lagarde has promised two rate hikes of 0.25 percentage points by September. The key interest rate would then at least no longer be negative. However, it would still be a long way from having a real impact. For this to happen, monetary policy would actually have to be restrictive and the key interest rate would have to rise above the so-called neutral interest rate. Experts see this value, where the interest rate would be neither expansive nor restrictive, at around 1.5 percent.
Until then, the ECB will continue to push the economy with its monetary policy – even though there are material shortages and delivery bottlenecks. “The main problem of the economy in the euro zone is not demand, but a lack of primary products that prevents companies from fully meeting demand,” Commerzbank chief economist Jörg Krämer clarifies.
But nobody talks about that at the ECB. It is better to look at the forecasts for the next few years and hope that they will come true. The central bankers are thus spared painful decisions for the time being.
Surftipp: Finanzwelt – ECB explains: Tasks and goals of the European Central Bank
