21st Century Business Herald reporter Wu Bin Shanghai report As inflation continues to soar, even the relatively dovish European Central Bank is not far from exiting the stimulus policy.
On February 18, local time, Peter Kazimir, the ecbence bank's governing committee, said that the ECB should end its regular asset purchase program (APP) in the summer and should have more flexibility in the interest rate hike schedule. In Kazimir's view, the problems that conventional asset purchase programs were supposed to solve have subsided, while the negative effects are becoming more and more apparent.
Overall, the ECB's interest rate hike this year has changed from a small probability event to a high probability event. Ahead of the March 10 policy meeting, there is a growing consensus among ECB officials to designate September as the end of the bond-buying program. According to the forward guidance issued by the ECB, bond purchases will continue until "shortly before the start" of interest rate hikes, which means that the ECB is likely to raise interest rates before the end of the year.
The ECB is gradually gaining hawk
The Eurozone consumer price index surged 5.1 percent year-on-year in January, well above economists' expectations of 4.4 percent, and rose to a record high of more than twice the ECB's 2 percent target, affected by a sharp rise in energy prices.
Against the backdrop of soaring inflation, despite the ECB's unchanged interest rates on Feb. 3, Governor Christine Lagarde acknowledged that inflation was more serious than previously expected, while rarely saying that "interest rates are unlikely to rise this year."
In addition, a noteworthy signal is that this week the ECB "centrists" also made remarks in favor of ending quantitative easing. ECB Executive Isabel Schnabel said inflation was much more persistent than previously thought, unemployment was at a historic low, and the ECB should consider the gradual normalization of monetary policy.
The European Central Bank also highlighted inflation risks in its Economic Gazette this week. On February 17, local time, the European Central Bank issued an economic communiqué warning that inflation in the euro area has been higher than expected for the sixth consecutive month, while geopolitical tensions have intensified, and persistently high energy costs may have a greater than expected drag on consumption and investment, and the ongoing supply chain problems are another major risk.
It is important to note that with the economic recovery and rising inflation, the ECB took a small step in tightening policy last December, ending its €1.85 trillion Emergency Anti-Epidemic Bond Purchase Program (PEPP) in March this year, while the regular asset purchase program will continue for some time.
And as more ECB officials realize that inflation is strengthening and need to raise benchmark rates by the end of the year, market expectations for a rate hike at the ECB are also heating up, with money markets now expecting the ECB to raise rates by 44 basis points by the end of the year and 25 basis points by October.
The European Central Bank, which is gradually turning hawkish, will also boost the euro. Dustin Reid, chief fixed income strategist at Mackenzie Investments, said that as officials such as ECB President Lagarde are less dovish, the eur/dollar is expected to climb as high as 1.20 (currently 1.13) by the end of the year. In contrast, eur/USD depreciated by about 7% last year as the market expected the Fed to raise interest rates and the ECB maintained a dovish stance.
It is important to note that while some ECB officials are starting to become more hawkish, some are still cautious. Philip Lane, the ECB's chief economist, insisted on taking the lead, warning that rate hikes could hurt regional economies and arguing that the eurozone's record inflation rate would also gradually slow without more aggressive action.
Uncertainty remains about future policy
Although the ECB will most likely tighten its policy in the future, the speed and intensity of policy tightening remain unclear.
Pablo Hernandez de Cos, a member of the ECB's Governing Council, warned not to rush to determine the timing of policy adjustments, as premature tightening could have a negative impact on demand. "The direction we need to go is clear, but we shouldn't draw premature conclusions about the time frame. This process will be gradual and will depend on the data performance. ”
For the future, supply chain issues are a major uncertainty for the ECB. The 2021 supply chain crisis has reduced the eurozone's economic expansion by 2 percentage points and reduced manufacturing output by 6 percent. Supply chain issues have also pushed up inflation, contributing about half to producer price increases that do not include energy costs.
As many countries around the world ease covid-19 restrictions, the worst phase of the supply chain crisis may have passed, but new mutant viruses similar to Omilon could still cause further disruption in the future.
The International Monetary Fund (IMF) said on the 17th that last year's supply chain disruption greatly affected the economic growth of the euro area, the epidemic factor may continue until 2023, and the long-term supply bottleneck prospect will bring challenges to the EUROPEAN Central Bank's monetary policy makers.
It should be noted that at a time when high inflation has made the ECB brewing interest rate hikes, the risk of policy mistakes cannot be ignored, and the market still has a little worry, will the ECB repeat the mistakes of more than a decade ago?
Tao Jin, deputy director of the Macroeconomic Research Center of Suning Institute of Finance, told the 21st Century Business Herald that looking back at history, the European Central Bank tightened its policy after the last round of financial crisis, but what happened afterwards proved that the EcB tightened excessively, indirectly exacerbating the European debt crisis. Now the ECB seems to be learning the lessons of that year and taking a relatively cautious approach to tightening policy.
According to the ECB's forecast, although the average inflation rate in 2022 is 3.2%, inflation is expected to fall to 1.8% in 2023 and 2024, below the 2% target.
Oliver Rakau, an economist at Oxford Economics in Frankfurt, said: "We are indeed concerned that a rate hike later this year may be wrong, and the underlying inflationary pressure is not yet large enough to warrant a sustained cycle of rate hikes. ”
Looking ahead, Tao Jin told reporters that under the drag of repeated epidemics and supply chain problems, the Inflation Problem in Europe may continue to worsen, when the European Central Bank will face a dilemma and need to make a difficult balance between controlling inflation and supporting economic development.
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