The ECB Governing Council has decided to end asset purchases at the end of June, clearing the way for a first interest rate hike in July. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, has commented on this matter:

Picture of the ZEW economist Friedrich Heinemann.
The ECB has always reacted quickly and decisively to combat inflation that is too low. However, the European Central Bank is acting very hesitantly to counteract the currently far too high inflation, observes ZEW economist Friedrich Heinemann.

“The end of the asset purchases was overdue and comes at least three months too late. Looking back at monetary policy in recent years, a strong asymmetry becomes apparent. If inflation was too low, the ECB always acted quickly using all available means to fight it. By contrast, Europe’s central bank has been very slow to counteract the currently far too high inflation. One explanation for the ECB’s eagerness to act when price increases are low and its passivity when inflation is too high can be found in the euro government bond market: The prospect of a cautious turnaround in monetary policy already pushed the Italy’s bond spread back up to over 200 basis points. The fear of a new euro debt crisis is still paralysing the ECB and damaging its credibility. The fact that the eurozone has not yet found a credible strategy for dealing with heavily indebted states is now taking its toll.”

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The ECB Governing Council has still not specified a date for a first interest rate hike. Despite record inflation in the eurozone, the deposit facility rate remains negative. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, has commented on this matter:

“The ECB claims to be in a dilemma because it is simultaneously confronted with high inflation and the threat of a war-related recession. In this situation the members of the ECB Governing Council are advised to simply take a look at the European treaties. There they will find a clear answer as to how the ECB should behave in such a situation: Since price stability is the primary objective, other objectives must be subordinated to it. The alleged dilemma does not exist if the ECB takes its mandate seriously. With every month of hesitating, the ECB Governing Council is damaging the reputation of this important European institution. A series of massively wrong inflation forecasts by ECB economists also feeds the suspicion that the assessment of inflation dynamics is driven by the desire to maintain a low interest rate policy and not, conversely, that interest rate policy is based on an undistorted inflation forecast.”

The ECB Governing Council has held out the prospect of putting an end to bond purchases in September if forecasts do not point to a slowdown in inflation. The end of the purchases is seen as a prerequisite for a first subsequent interest rate hike. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, has commented on this matter:

“The war in Ukraine has massively raised uncertainty about the economic development of the eurozone. Two weeks after the outbreak of war, it is impossible to predict to what extent the conflict will dampen the recovery of the economy. It is understandable that the ECB is still taking some time before initiating the change in monetary policy. However, the Russian invasion of Ukraine has ultimately made the necessary change all the more pressing. The renewed rise in energy prices will further fuel inflation in the short term. Even more important for monetary policy are the inflation processes that have been triggered. The accelerated restructuring of the energy supply will be costly and drive prices up for years to come. Moreover, in the forthcoming bargaining rounds, unlike last year, the unions can no longer afford to simply ignore the currently witnessed very sharp decline in the purchasing power of wages. The war will have a longer-term inflationary effect, and the Governing Council must soon find a convincing solution to this threat.”

The ECB Governing Council has not yet initiated any measures to tighten its monetary policy in January 2022 despite the persistently high inflation in the eurozone. Professor Friedrich Heinemann, head of the research area "Corporate Taxation and Public Finance" at ZEW Mannheim, has commented on this matter:

“The ECB’s interest rate policy and bond purchases now appear to be very much out of date. Europe’s central bank is still pursuing a policy of fighting deflation, even though Europe is experiencing the strongest surge in inflation since the introduction of the euro and inflation expectations are rising. The Governing Council now risks seriously damaging the ECB’s reputation. More and more monetary policy observers are wondering whether price stability is still the ECB’s top priority. With the rigid adherence to an extremely loose policy despite this surprisingly prolonged high inflation, the suspicion is growing that a majority of the ECB’s Governing Council is driven by entirely different goals, such as the easy financing of high government deficits. It is high time that the ECB proves that it is not trapped in fiscal dominance.”

The ECB Governing Council has decided to end net bond purchases under the PEPP crisis programme at the end of March. In return, however, purchases under the regular bond-buying programme are to be expanded. Furthermore, maturing bonds will be purchased under the PEPP until at least 2024. Thus, the ECB retains a high degree of flexibility to deviate from its capital key. Professor Friedrich Heinemann, head of the research area "Corporate Taxation and Public Finance" at ZEW Mannheim, has commented on this topic:

“Although this is a first step towards exiting the crisis policy mode, the decision is still a half-hearted one. With the phase-out of the PEPP, the crisis policy mode actually ends only on paper; in fact, net government bond purchases under the PSPP continue. It is also controversial that the ECB Governing Council plans to use maturing PEPP funds until at least 2024 to provide targeted additional support to individual countries, if necessary. If the ECB does indeed continue to disproportionally benefit certain euro states for years to come with its government bond purchases, then this is no longer a conventional monetary policy, but clearly serves to finance states with critical debt levels. Such an approach, which was still justifiable in the acute crisis, is now becoming increasingly problematic as the economy recovers and inflationary pressure rises. The next proceedings before the Federal Constitutional Court and the European Court of Justice on the legitimacy of bond purchases promise to be exciting.”

Date

10.06.2022

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