Lower interest rates to 0 percent, even bring one of the interest rates to -0,4, buy government and later corporate bonds on a large scale, provide banks with free money. The European Central Bank (ECB) has pulled out all the stops in recent years to allow inflation in the currency union to bounce from 0 percent or even deflation to 2 percent.
For years, the ECB's policy has been ineffective. However, inflation has risen rapidly in recent months. According to the first reports from Eurostat, the European statistical office, the currency depreciation in February will be 2 percent. It is the fastest rise in prices the eurozone has seen since January 2013.
It also doesn't look like the rise in inflation is over. Not only the effect of the oil price, which has been written about several times in previous contributions, points to this, other developments also argue for this.
For example, prices that companies have to pay to produce, from procurement to labor costs, rose by 3,5 percent in January, the strongest increase in almost 5 years. It is expected that companies will try to pass those costs on to their final customers, something that could push inflation further into the rest of this year.
This rise in inflation will fuel calls for the ECB to loosen its monetary policy. After all, that very generous policy was pursued with the aim of boosting inflation and that is now a fact. What consequences could that have for that policy from Frankfurt?
The ECB is not expected to radically change its monetary policy any time soon. In fact, it is even plausible that the bank will continue to sail on the same course. All statements made by the bank's board members in recent months indicate that the bank will ignore the aforementioned rise in inflation. In other words: interest rates remain low and the government and corporate bond purchase program (80 billion euros this month and 60 billion euros per month thereafter) will continue as usual.
It is noticeable, however, that resistance to an even looser policy within the ECB board is growing. The President of the German Bundesbank in particular is an outspoken opponent of the course the ECB is taking, with Dutchman Klaas Knot at his side.
This stronger resistance could make it much more difficult for the bank to ease monetary policy further in the coming months. The ECB is not expected to decide to end the aforementioned buying program at the end of this year, but the chance of this, as well as the chance of further reducing monthly purchases in 2018, is now increasing.
That, in turn, would mainly affect long-term interest rates. These are now being kept low in the eurozone, mainly because of the buying up and the prospect of their continuation by the ECB. If the market 'smells' that the ECB could stop doing this next year, long-term interest rates could just start a sprint.
The ECB board will meet next week. No new decisions are expected during this meeting, but the meeting will provide insight into what can be expected from the ECB front in the coming years. This is because the bank will then publish its most recent forecasts for economic growth and inflation for 2017, 2018 and 2019.
If the inflation forecast turns out significantly higher for 2018 and 2019, there is a chance that the ECB will loosen monetary policy towards the end of this year. The latest inflation forecast for 2018 is 1,5 percent inflation. If the ECB economists now assume, for example, 1,9 or 2 percent in that year, then the ECB should really not be able to avoid it and have to adjust its policy. So to be continued next week.