In 2 days it will be exactly 1 year since the first European corona case was diagnosed. Although there is now a vaccine, Edin Mujagic, chief economist at OHV Asset Management, does not see a ray of optimism at the ECB.
The ECB board, which met yesterday (Thursday), takes into account that economic activity in the final months of last year fell to such an extent that when the figures on economic growth are announced, there appears to be a contraction . The damper on growth continues in the first quarter of this year.
Although governments have responded with additional stimulus measures to help the economy, consumers are cautious for fear of the impact of the pandemic on employment and their income. The uncertainty also slows down business investments.
Banks are not jumping
The quarterly survey on banks' willingness to provide new loans shows that they are less eager to approve new credit applications. They are concerned about the ability of companies to meet their interest and repayments later this year.
On the inflation front, the ECB saw prices fall slightly in December. Although the bank expects inflation to rise slightly in the coming months, bank President Christine Lagarde noted that inflation pressures remain weak beneath the surface. Read: the increase in inflation in the coming month is nothing in terms of level and it cannot even be called structural. According to the bank, when the pandemic blows over, an increase in inflation can be expected in the medium term.
Inflation far too low
Even then, inflation is far too low compared to the ECB's target rate: annual inflation below, but close to, 2%. All in all, according to Lagarde, the support from governments and other European institutions remains not only necessary, but crucial. The ECB is one of those 'other European institutions'. That is why the decision to keep interest rates at 0% and to continue buying government and corporate bonds worth more than €100 billion per month is just as surprising as the regular wind and storms in the Netherlands in January.
The ECB will keep the official interest rate at 0% or lower it further until expected inflation has structurally risen to the target rate. I doubt whether that will happen in the first half of this decade.
Glass half full or half empty?
But is the glass half full at the ECB, just like at the US central bank Fed, or do the European monetary knights have difficulty even talking about a glass half empty? The Fed is gloomy about the economic prospects in the first half of the year, but hopeful about the second half. Especially due to large-scale vaccinations against the coronavirus by then. After listening to President Lagarde, my conclusion is that the glass in the eyes of the ECB contains a very thin layer of water at the bottom.
Vaccination has started and will be scaled up in the coming months. The US has a new president, who has announced a larger round of support for the economy. The uncertainty surrounding Brexit is over. However, the ECB mainly emphasized risks with a view to this year. "The start of vaccination in the Eurozone is an important milestone in the fight against the healthcare crisis. Nevertheless, the pandemic continues to pose a serious risk to the health and economy of the Eurozone and the world. It will take some time before society becomes immune ", said Lagarde.
Total absence of optimism
The French bank president also said: "Let me say again that what we do by definition indicates what we do not do." Paraphrasing, I want to say that what the ECB does not say is actually significant for watchers like the undersigned. The almost total absence of optimism about economic growth - although there is sufficient reason for this with the vaccine as a weapon against corona - is telling. How come?
Why is the ECB's glass only filled with a thin layer of water and does it choose not to even talk about a glass half empty? I suspect that the bank is afraid that the discussion will start when monetary policy has to be made less loose. That at the very least, bond buying should be phased out. That discussion could cause financial problems for many governments in the eurozone. Something the ECB wants to prevent.
The fact that the bank is careful about this tells me that they are doing everything they can to justify the policy of keeping interest rates at 0% and hoarding bonds on a large scale. For a long, long time.