The European Central Bank (ECB) has kept its promise made in October. On Thursday 10 December, the bank announced a new package of measures. For example, the purchase program PEPP, started in response to the corona crisis, will be expanded by € 500 billion. The term has been extended by 9 months to March 2022. And there are more Christmas gifts.
The interest and repayments that the ECB receives as owner of the bonds purchased through the PEPP program will be reinvested until at least the end of 2023. That is to say: reinvested in new government and corporate bonds from the eurozone.
The total amount that banks may take out in special loans with 1% interest (the so-called TLTROs) has also been increased. These are special loans, because the banks must use that money to grant credits to companies and families in the currency union. The ECB wants to boost economic activity and inflation.
Every cent goes out
Christine Lagarde, president of the ECB, did say that the €1.850 billion "does not have to be spent in full." But she finished that sentence by saying that the purchasing program could also be further intensified. In other words, it can go either way. In theory. In practice, that means it can only go one way: every cent is going to be spent. And then the key question: when can the ECB change its course? When will the bank stop buying, sell bonds and raise interest rates? Nothing will come of that between now and 2025. Why?
The ECB aims for annual inflation of below, but close to, 2%. Although, as an aside, now it is. The new monetary strategy to be announced next year will most likely raise the inflation bar. Every quarter, the ECB economists make estimates about, among other things, inflation 2 years ahead. In December we received an update for the estimates for 2021 and 2022, but also for the first time the estimate for 2023.
Estimate not high enough
This shows that the bank expects inflation to be 2023% in 1,4. It doesn't matter at all whether that estimate comes true or not. What is important is that the bank bases its policy in 2021 and beyond on that estimate. And the estimate is simply not high enough for the bank. Not even by a long shot. Lagarde has previously said that even 1,7 or 1,8% inflation is not close enough to 2%.
This estimate actually says that there is a greater chance that monetary policy in the euro zone will become looser in the near future than that it will be tightened. Or, to recycle an analogy I used earlier: the chance that we will ride an Elfstedentocht on natural ice on July 31, 2021 is even greater. In concrete terms: if you had hoped that your savings interest rates would reach somewhat normal levels in the first half of this decade, then I fear that that hope has really disappeared after December 10. And with even a little bit of inflation, you make a loss because your purchasing power drops.
Throw away compass
But the most important thing about the ECB meeting in December was something other than the €500 billion. Jean-Claude Trichet, the bank's second president, once said that the ECB has only one needle in its compass: inflation. The bank must try to keep this low. Even though the ECB has been hinting for some time that it is aiming for higher inflation, what remained true was that inflation was that needle. Until December 10, 2020.
Lagarde said several times that the ECB's goal is to ensure something called "favorable financing conditions." That can be roughly translated as 'keeping interest rates low.' That is de facto throwing away the compass that Trichet once talked about. And putting a new, modern version into use. A version that gives the ECB much more room to continue pursuing the current policy for a long time and to make it even broader.
That is what analysts, economists, investors and others who are affected by the consequences of ECB policy – and that is ultimately all of us – must pay attention to after the ECB meeting on December 10, 2020. And not so much the extra €500 billion and more special loans for banks. The last two are corollaries of the ECB's new modus operandi.
Provided with an alibi
The strategy review that the bank is conducting, which should lead to a new monetary strategy next year, is nothing more than a necessary formality. To provide the new monetary strategy that is already being pursued with a legal-economic underpinning. An alibi, you could say.
One last word on how long the ECB will continue to buy government and corporate bonds, including the aforementioned reinvestments. The bank says it will continue until 'significantly after the first interest rate increases'. Translated into time: I see Lagarde leaving the bank in November 2027 (when her mandate as president ends) without the ECB having stopped large-scale bond purchases. That is not equal to 'QE forever', but comes down to 'QE for a long, long time'.