Inflation-boosting ECB policy continues

The ECB sees the war in Ukraine having a clear impact on both economic growth and inflation. How the war will affect both of them in the coming months is highly dependent on developments in the Eastern European country. At the moment, ECB economists estimate that economic growth will be lower, certainly in the short term. Inflation, on the other hand, will be 5,1% this year (where the ECB aims, for the record, 2%), followed by 2,1% in 2023 and 1,9% in 2024. 

Hawk-like conclusion incomprehensible
If that expectation for 2024 does indeed come true, then for the first time in a very long time, the ECB will fulfill its mandate: to keep annual price increases at 2%. Even so-called core inflation, inflation excluding energy and food prices, will be 2024% in 1,9, according to ECB economists. If the war in Ukraine lasts a long time and escalates, prices are expected to climb even faster. The bank therefore decided to spend €40 billion in April with its APP cap on. APP is the bank's buying program, with which it hoards government and corporate bonds. That will be €30 billion in May, followed by €20 billion in June. If inflation remains high, the bank will stop altogether in the course of the third quarter. 

It was that decision that led to that conclusion that made the ECB hawkish. And I find that conclusion incomprehensible to be honest. For starters, it is far from certain that the ECB will stop buying government bonds in the third quarter. Christine Lagarde, president of the bank, said several times during the press conference today that there is no question of an accelerated phasing out. It is all in line with decisions the bank made long before the Ukraine war. In other words: that war had no influence on it at all. For the record: not me, but the ECB itself. 

Stopping buying is not a foregone conclusion
Secondly, even if the ECB stops buying up, the so-called reinvestments will continue. The money that the bank receives as the owner of approximately €5.000 billion in purchased government and corporate bonds, it immediately invests in new debt securities. This is between €30 and €40 billion per month on average. The amount of bonds purchased ensures that the ECB can continue to use them for years to come. By the way, on stopping buying in the third quarter, Lagarde said that's not a foregone conclusion. And that it is also possible that by then, depending on developments, the ECB decides to step up its buying.   

Thirdly: with an estimate that the annual currency depreciation in two years will reach the desired level, there is no official interest rate of 0%. But an interest rate hike is a long way off. The ECB says it will only raise official interest rates 'some time' after it stops buying bonds. That is something that will last at least until the end of September and 'some time' means at least a few months, according to the ECB president. In other words: in the most favorable case - in which the ECB buys its last bond on October 31 - an interest rate hike is expected sometime in early 2023. 

Clearly not hinting at interest rate hikes
But – and fourthly – even after that possible rate hike, official interest rates are far too low, given the expectation that inflation will be close to 2024% in 2. 'Hawkish' would apply if the ECB had hinted a little more clearly at a series of rate hikes, if only in 2023. But that clearly didn't happen. Monetary policy remains very accommodative, even after an interest rate hike in early 2023. A synonym for 'inflation-promoting', not inflation-braking. 

Admittedly, the ECB has omitted the part that the official interest rate can also be lowered from the statement afterwards. But to use that as an argument to call the bank's decisions hawkish is going a few bridges too far. Moreover, given the very high inflation, given the expectation that it will rise even higher in the near future and given the ECB's expectation that the currency depreciation will be close to 2024% in 2, leaving the said phrase in there would have been laughable . That piece had to come out, to prevent the ECB from making itself immortally ridiculous. But that is not an argument to regard the bank as hawkish.

Finally, I see bond buying and changing official interest rates as two instruments that the ECB trades against each other, as it were. The bank has decided today to possibly phase out its purchases in the course of this year. But the 'price' for that seems to be that the moment of the first rate hike since 2012 has shifted further into the future. In terms of central bankers whom we would describe as hawks and doves (i.e. those who want to tighten the monetary reins and those who don't want to or let them celebrate further), I say that the doves within the ECB are still pulling the strings today. have drawn.