Faced with the uncertain economic consequences of the Russian invasion, the guardians of the euro remained cautious at their last meeting in March.
The European Central Bank (ECB) will try on Thursday to clarify its answer to the puzzle that combines runaway inflation and fears of a recession linked to Ukraine, a factor in growing tensions between those in charge of monetary policy.
Faced with the uncertain economic consequences of the Russian invasion, the guardians of the euro remained cautious at their last meeting in March.
Will they judge the context more readable when they meet on Thursday in Frankfurt?
Discussions should be heated between the “hawks”, supporters of a rapid monetary tightening to try to curb the outbreak of prices, and the “doves”, who fear that a withdrawal of support weighs down faltering growth.
The ECB is so far the most wait-and-see of the major central banks. Everywhere else, interest rates have started to rise. Announced a long time ago, the first increase by the American central bank (Fed), of a quarter of a percentage point (0.25%) in March, will be followed by several others.
The rates of the Frankfurt institution are still camped at a historically low level.
Rates raised this summer?
At its last meeting, the Board of Governors had given pledges to the “hawks” by deciding to reduce its intervention in the markets faster than expected.
Debt buybacks – the main part of its ultra-accommodative monetary policy consisting of injecting billions of euros into the economy – must end in the third quarter.
But the institution was careful not to go further, just saying that the first rate hike will take place “some time later”.
Since then, inflation in the euro zone has soared once more, reaching its highest level since the creation of the single currency with 7.5% in March, a long way from the ECB’s medium-term target of 2%.
Financial markets take for granted a rate hike by the ECB this year, before others in 2023.
If no major decision is expected Thursday by analysts, the press conference of President Christine Lagarde will be closely followed to detect any indication of an even more aggressive turn on inflation.
“We believe that (the ECB) will advance its plans to raise rates,” say analysts at Capital Economics, who expect a first increase “from July”. Goldman Sachs plans a first step in September.
The Frenchwoman might be forced to explain the decisions remotely, following having tested positive for Covid-19 at the end of the week.
no spiral
The ECB rejects critics accusing it of laxity in the face of inflation.
One of the members of the Executive Board, Fabio Panetta, recently recalled that the price spike, largely due to high energy costs and supply problems, was largely beyond the control of the ECB and that an intervention too fast for the institution would be risky.
“Asking monetary policy alone to bring inflation down in the near term while inflation expectations remain well anchored would be extremely costly,” the ECB official said.
The danger would be to further weigh down the economy of the euro zone while “quarterly growth rates will be very weak this year” and might even go “into negative territory”, he added.
The ECB continues to expect inflation to decline in 2024 to around 2%.
For the moment, it has not seen any slippage in wages, which would cause a lasting spiral, even if over the months it has continued to revise its inflation forecasts upwards.
But the debate is lively among its leaders.
The minutes of the March meeting showed that “the Board of Governors is divided” in particular on the duration of the surge in inflation, judge Frederik Ducrozet, analyst at Pictet, according to which “the hawks have the advantage. »
“In my opinion, the risk of acting too late has increased,” declared late March one of the proponents of monetary orthodoxy, the President of the German Federal Bank Joachim Nagel.
The Board of Governors, on the other hand, was unanimous on the need for additional support measures from governments.
Several countries including France, Germany and Spain have already announced aid to households and businesses, in particular to reduce the energy bill.
