ECB Monetary Policy Pressured by Two Strong Opposing Economic Forces

The European Central Bank kept its benchmark interest rates unchanged, as widely expected, and clung to its decision to end the stimulus program in the third quarter of this year, but gave no further details that disappointed markets as many expected a light reaction in light. of rising inflation that has prompted some major central banks to start tightening policies.

La ECB ‘s President Christine Lagarde pointed to the growing uncertainty about the war in Ukraine as the main obstacle, but said the central bank would remain willing, gradual and flexible in its monetary policy.

The end of asset purchases could come at any time in the third quarter but without further information on the timing, and also without a deadline for when the central bank will start raising rates, adding that a rate hike could occur weeks or even months later. the stimulus ends and when the ECB gets there.

An unexpectedly divisive stance suggests that the European Central Bank is diverging from all its major counterparts, as the US Federal Reserve and the Bank of England have already begun tightening their policies after nearly three years, with the US central bank leading expectations for eight or more. rises in the next two years.

The most recent action to increase the cost of borrowing has been seen by the central banks of New Zealand, Canada and South Korea.

Policymakers have been divided, as hawks, including governors from Germany, Austria, the Netherlands and Belgium, have called for tariff increases, arguing that inflation could rise, with households and economies as a whole already hit hard by growth. energy pricesdraining household savings and growing uncertainty.

On the other hand, Pigeons supported their decision with the notion that most of the inflation is the result of an external supply shock, so the price pressures will weaken over time.

Lagarde backed the central bank’s decision to stay afloat because of the situation in Ukraine, as all 19 eurozone economies are heavily exposed to the conflict, which further damages confidence and adds to persistent supply disruptions that began during the coronavirus pandemic. .

Members of the bloc are also deeply concerned about the inverse effect of sanctions imposed on Russia, as the latest plan to add Russian oil and natural gas to the list of banned items imported from Russia, as the bloc so far lacks unity on this issue, with strong dissonant tones coming from Germany, the largest economy in the EU, Hungary and Slovakia.

If all members agree to impose sanctions on energy from Russia, which would further undermine the economy of the already fragile bloc that has not recovered from the pandemic and sent most of the union’s countries into recession, a scenario that everyone wants to avoid.

Lagarde stressed that the development of the EU economy will depend heavily on the development of the conflict, resulting in the central bank’s long-term policy of “sit and wait”, which continues to damage confidence and obscure the outlook as economists have already lowered bets. about a rise in the exchange rate at the end of the year.

The ECB is currently facing two opposing economic forces as the recent rise in inflation, which has risen to a record high of 7.5%, clashes with the central bank
purchases of nearly 5 trillion euros of public and private debt in recent years, aiming to revive inflation, which has been stubbornly low since 2015 until recently.

Continued pumping of money into the economy, although the ECB has signaled that it will end purchases sometime in the third quarter, will continue to fuel inflation, which is already at an all-time high and threaten to further undermine economic growth that would push the economy out of the economy. a block to the economy. recession.

On the other hand, the European Central Bank fears that raising interest rates in a situation when the economy has not recovered from a strong contraction during the Covid pandemic could have a negative effect.

Overall, the EU is in a difficult situation, as five major German economic agencies have sharply lowered their forecasts for the GDP growth of the bloc’s largest economy, which is expected to take over the entire EU economy, with a dramatic warning that the economy would fall. a recession as the EU would sanction itself by imposing sanctions on Russian energy.