The ECB on Wednesday warned of a possible credit crunch and had been expected to address the issue of its key interest rates on Thursday. Once again, the doves got the better of the hawks. The interest rate on the main refinancing operations, as well as on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively.
It is the last major central bank to remain ‘on the sidelines’. The Fed’s first rate hike of a quarter of a percentage point (0.25%) in March was decided long ago and will be followed by several others.
The term stagflation carefully avoided
However, in view of the consequences of the war in Ukraine, the ECB now shares the view that inflation, which has accelerated and intensified in many sectors, will remain high in the coming months. From 5.9% in February, it rose to 7.5% in March in the euro area.
As for the economic outlook, it will depend on the conflict, the impact of existing sanctions and possible additional measures. Today, the outlook has been revised downwards. Growth is estimated at +0.3% in the fourth quarter of 2021. In the first quarter of 2022, growth is not expected to be higher because of the restrictions due to the pandemic, according to Christine Lagarde, president of the European Central Bank. The war is now taking over as a brake on growth.
However, Lagarde did not mention the ‘dirty word’ on the lips of more and more analysts: stagflation.
Despite this--or because of it--the bank’s governing council is not reconsidering the scenario defined in recent months, namely a rise in key rates that will occur “some time after the end of the governing council’s net purchases under the asset purchase programme”. This programme will end as planned in the third quarter. No further details have been given.
See you in June
Until then, monthly net purchases under the APP will amount to €40bn in April, €30bn in May and €20bn in June. The following quarter, “the calibration of net purchases will take into account the data and the evolution of the governing council’s assessment of the outlook,” the ECB explained. The bank’s governing council “will not rule out any option and will maintain progressivity and flexibility in the conduct of monetary policy”.
The governing council also intends to continue reinvesting, in full, the principal repayments on maturing securities acquired under the APP for an extended period after the date on which it starts to raise the key ECB interest rates and, in any case, for as long as necessary to maintain favourable liquidity conditions and a high degree of monetary support.
The governing council also intends to reinvest principal repayments on maturing securities acquired under the Emergency Pandemic Purchase Programme until at least the end of 2024. Net purchases under the EPPP could also resume, if necessary, to counter negative shocks related to the pandemic.
Between the fight against rising inflation and the preservation of increasingly fragile growth, the ECB’s room for manoeuvre is shrinking. Its next meeting is in June.
Originally published in French by Paperjam and translated for Delano