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ECB chief economist Philip Lane is asking for patience with normalization


Philip Lane is the ECB’s chief economist.
Image: Reuters

After the US Federal Reserve announced that it would gradually reduce its bond purchases, the ECB is asking for patience. Chief Economist Philip Lane says: The Eurozone is far from being in the position to end the bond purchases.

ANder than America’s Federal Reserve (Fed), the European Central Bank is still a long way from stopping bond purchases. ECB chief economist Philip Lange said in an interview published on Monday with the Spanish daily El País that the euro area is “far from being in a situation in which we end asset purchases”.

“There should be no doubt that we are going to ensure that Europe has a strong recovery and that that recovery is not derailed by unnecessarily tightening funding costs,” Lane said.

At its December meeting, the Governing Council wants to decide on the future of the PEPP crisis program. So far, Europe’s central bank has only slowed the pace of its bond purchases. According to current planning, the PEPP (Pandemic Emergency Purchase Program) purchase program launched to cushion the corona shock should run until at least the end of March 2022. ECB President Christine Lagarde said after the most recent ECB meeting at the end of October that she expected the PEPP to end in March.

However, the central bank wants to invest new money from expiring securities of the 1.85 trillion euro program afterwards. In addition, there is sympathy in the Governing Council for the idea of ​​transferring the flexibility of the emergency purchase program to other bond purchase programs. Critics accuse the ECB of using all the cheap money to fuel inflation, which it actually wants to keep in check.

Last week the US Federal Reserve decided to start tightening monetary policy. It is reducing its bond purchases (quantitative easing), which were previously $ 120 billion a month, by $ 15 billion in November and another $ 15 billion in December. The inflow of money is likely to be slowed down at a similar pace in the months to come. The key interest rate will remain in the range of 0 to 0.25 percent for the time being.

In the medium term, inflation is too low

“Inflation is unexpectedly high right now, but we believe it will go down in the next year,” Lane said in the interview. “And if we look at the situation in the medium term, the inflation rate is still too low, it is below our target of two percent, but not too high.”

The ECB explains the rise in consumer prices for the most part with special factors such as the recovery in oil prices after the corona shock and delivery bottlenecks as a result of the significantly increased demand. In addition, the withdrawal of the temporary VAT reduction in Europe’s largest economy, Germany, is now having a full impact.

There are weighty reasons for inflation to decline next year, Lane said. One has to “have enough patience not to overreact to a temporary rise in inflation”.

Holger Schmieding, chief economist at Hamburg’s Berenberg bank, commented: “The American central bank has a far bigger inflation problem than the ECB. In the United States, the central bank has to take countermeasures, since fiscal policy there was and is far too expansionary. That is not the case in the euro zone. “

ECB will not get out anytime soon

The ECB’s monthly bond buyers are currently higher than the Fed’s, relative to GDP, said Schmieding. Projected over the year, the ECB comes to around 10 percent of GDP, the Fed to 6.3 percent.

“The Fed has announced that it would like to end its bond purchases in eight even steps by the end of June 2022 – so it is way ahead of the ECB, which has only scaled back its crisis program so far,” said Schmieding. Even if the crisis program ends on schedule at the end of March 2022, the ECB wants to continue its normal purchase program until the first rate hike is imminent.

“We will probably have to wait until spring or summer 2023 for an announcement by the ECB that it will completely stop its bond purchases,” said Schmieding: elevated.”

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