“Inflation, inflation, inflation.” The president of the European Central Bank, Christine Lagarde, has admitted this Thursday that the rise in prices has occupied a good part of the discussions at the meeting of the Governing Council of the European Central Bank (ECB). And although he has argued that the “phase of high inflation” is lasting “longer than expected”, the institution he presides continues to anticipate that it will fall throughout 2022. The entity continues to attribute the bulk of the rise in prices to the energy and closely follows two phenomena: bottlenecks in production and wage negotiations. However, he has considered that these bottlenecks in factories and distribution will gradually unravel in the coming months and energy prices will relax, which will allow inflation to also moderate.
The increase in inflation has been blurring the story about the economic recovery that the European institutions had been holding, which until now have remained firm in the thesis that it is better to go overboard than to fall short of the stimulus. The European Central Bank (ECB), with its pandemic emergency purchase program (PEPP), and the European Commission, with the European recovery fund, have moved within these parameters. The rise in prices, however, has put more pressure than ever on the Eurobank, whose governing council met this Thursday in Frankfurt.
The markets were not expecting any major changes, but they were attentive to any reference that its president, Christine Lagarde, could make on inflation. “Inflation is increasing, mainly due to rising energy prices, but also because the recovery in demand is outpacing limited supply. We anticipate that inflation will increase even more in the short term, but then it will decrease in the course of the next year.
Lagarde has so far reconciled hawks, who wanted to accelerate the step in the withdrawal of the debt purchase program, and palomas, who fear that any misstep in the withdrawal of these acquisitions could mean an increase in risk premiums. For now, Lagarde has used diplomacy to try to dispel those fears. “Favorable financing conditions are essential for the economy to continue its recovery and counteract the negative impact of the pandemic on the inflationary path,” he reconciled.
The governing council has decided to maintain debt purchases to combat the pandemic – endowed with 1.85 trillion euros – until the end of March 2022 or, in any case, “until it considers that the crisis phase of the coronavirus has ended. ”. Of course, without the voracity of previous quarters, so it continues with its intention to relax the rhythm of asset purchases, going from a monthly volume of 80,000 million to an amount that analysts estimate will be between 60,000 and 70,000 million euros. Similarly, the ECB has decided to keep interest rates intact at 0% and the deposit facility at -0.5%. “We continue to consider that favorable financing conditions can be maintained with a moderately lower rate of net asset purchases under the pandemic emergency purchase program (PEPP) than in the second and third quarters of this year,” he added.
The ECB raised its inflation projections for 2021 to 2.2% in September, but considered that in the medium term it would once again fall below 2%: 1.7% in 2022 and 1.5% in 2023. In interventions Later, Lagarde insisted time and again that inflation is “temporary” due to bottlenecks, labor shortages in some sectors, the strong rebound in consumption after the pandemic and the sudden rise in energy prices. . And he also asked “not to overreact.”
Lagarde this Thursday detailed that the rise in inflation is due to three factors: energy prices, which explains half of the September price increase in the euro zone; the recovery of demand due to the reopening of the economy, and the end of the temporary reduction of VAT in Germany. Even so, the president of the ECB has admitted the risks that are on the horizon: “If the bottlenecks persist and translate into higher wage increases than expected or if the economy returns more quickly to its full capacity, the pressures on the prices could become stronger ”.
“The comparisons are hateful”
Lagarde stayed on the script. The markets did not expect more announcements about the purchase program, much less about an eventual cut in interest rates. And there were none. The decision will come next December, when the institution must decide the fate of the emergency program. Lagarde has not yet shown his cards, but he has warned that, despite the economy continuing to grow, the rebound has lost steam. And it has rejected any comparison with the United States, where the Federal Reserve has sent signals of a more rapid withdrawal of stimuli. “The comparisons are odious”, has settled.
The march of Jens Weidmann to the head of the Bundesbank is, for the moment, hawks within the institution. However, he leaves as a legacy a speech for the rest of the orthodox sector of the institution, which in recent times has been forced to lower its tone by some desertions – such as that of the Finn Olli Rehn – and, above all, the enormous coup of the crisis. Minutes from the ECB’s September meeting show that advocates of the discipline have already warned of inflation. In public, not only hawks have spoken. Mário Centeno, governor of the Bank of Portugal, warned of the dangers of an untimely withdrawal of monetary stimuli. The moment of truth will come in just under two months, when Lagarde will again have to resort to her diplomatic skills to reconcile the two souls of the council and address the rise in inflation without derailing the economic recovery.