The ECB reiterated on Thursday that it will only raise the cost of borrowing after it scales back its purchases of government bonds, which it said is likely to happen sometime in the third quarter. Its counterparts in the US and UK have both hiked rates in recent weeks as global inflation soared.
“In the current conditions of high uncertainty, we will maintain the optional nature, the gradual nature and the flexibility in the conduct of monetary policy,” ECB President Christine Lagarde said in a statement highlighting the growing risks for the economy. economic growth due to war in Ukraine, pandemic restrictions in Asia, and the associated rise in energy costs driving up prices.
Speaking to reporters from home, where she is recovering from Covid-19, Lagarde said rate hikes may not come for weeks or even months after her bond-buying program ends. .
“We’ll deal with interest rates when we get there,” she added.
Eurozone inflation hit 7.5% in March, according to Eurostat figures – its highest level since the European Union began collecting data around a quarter of a century ago. Inflation in Germany, Europe’s largest economy, hit 7.3%, its highest level in 41 years.
Soaring energy prices and ongoing supply chain disruptions have weighed on European producers and consumers, and the war in Ukraine has only made matters worse, driving up natural gas prices and oil as buyers jostle to replace Russian supplies.
The ECB’s stance remains largely unchanged since its last meeting in March, held just two weeks after Russia invaded its neighbour. The central bank expects inflation to remain high for the rest of this year before falling sharply in 2023 and 2024.
Like other central bankers, Lagarde walks a tightrope: raise rates too quickly, and she risks tipping Europe into a recession just as it begins to recover from the pandemic. Its task is made even more difficult by the fact that Europe is more directly exposed to the economic fallout from the war than the American or British economies.
Move too slowly and inflation could stay well beyond the bank’s 2% target. While growth in the Eurozone likely remained weak in the first quarter, the region is now looking ahead stagflation — the nightmarish combination of high inflation and a stagnant economy.
“History has shown us how easy it is to get this tricky dance wrong,” Sophie Lund-Yates, senior equity analyst at Hargreaves Lansdown, told CNN Business. “The ECB’s decision is in direct contrast to the United States, where there have been accusations of potential increases being too thick and too fast.”
The rate increases in Europe are likely to arrive, but will be “more delayed” than expected, she added.
The ECB’s caution has shaken many in Germany.
Christian sewing, German Bank (comics) CEO and chairman of the Association of German Banks, said last week that a rate hike was “urgent” because high inflation was “toxic to the stability” of the German economy.
Otmar Issing, the ECB’s first chief economist and one of the architects of the euro, told the Financial Times earlier this week that his former employer “lived in a fantasy”.
“The ECB has contributed massively to this trap it is now caught in as we head towards the risks of a stagflationary environment,” he told the publication.
Although now is not the right time to raise rates to high levels, Issing said the ECB’s inflation forecast model was outdated and had not understood how the pandemic and the war in Ukraine had brought about fundamental changes in the global economy.
Germany has a deep-rooted fear of inflation, given the role the hyperinflation of the 1920s is widely believed to have played in the rise of the Nazi Party.
Many Germans are growing increasingly frustrated with Lagarde’s inaction. Bild, one of the most popular newspapers in the country, gave her the nickname “Madame Inflation”.