European Central Bank policymakers are set for a showdown, this is because of their chart a new policy path amid growing fears of a third wave of coronavirus infections. The guidance update is made necessary by the ECB’s new strategy. This says that the central bank should let inflation across the 19 countries that use the euro currency edge above 2%.
The change in strategy was unanimously adopted, but putting it into practice is trickier. And that is because of the rate-setters on the ECB’s Governing Council disagree on the economic outlook and thus on how much more stimulus. The ECB’s current guidance is that it will buy bonds for as long as it deems necessary and keep interest rates at their current, record low until it is happy that inflation is converging to its target. Governors from indebted countries such as Portugal’s Mario Centeno and Italy’s Ignazio Visco have come out in force to argue that the new strategy means the ECB should keep the money taps wide open for even longer. Centeno told that the strategy admits a temporary and moderate inflation values above 2%. And that they must be patient and tolerant with deviations that they would not tolerate previously.
Visco too said that any premature tightening should be avoided and he cited the risk of a third wave of COVID, which has already seen curbs reinstated in some euro zone countries. ECB President Christine Lagarde has not given any specific indication to how the guidance could change although her emphasis on the persistence that they need to demonstrate suggests she might weigh in on the doves’ side. But hawks, who favor tighter policy, tend to come from countries with lower debt-to-GDP ratios, will not go down without a fight from the meeting.
German ECB board member Isabel Schnabel said that the inflation could converge to the ECB’s target maybe sooner than some people expect at the moment. And fellow German Jens Weidmann, president of the national Bundesbank, said the ECB should not seek to make up for lost ground in the past decade. And this is when inflation was below its target for most of the time. ECB expects inflation in the euro zone to hit 1.9% this year. Ultimately, the devil might be in the detail of the policy message and that is crucial for investors but often fails to cut through to the general public.
The ECB currently says that it expects to stop adding to its Asset Purchase Program shortly before it starts raising the key ECB interest rates. The central bank is also running a separate, 1.85 trillion-euro Pandemic Emergency Purchase Program (PEPP). Lagarde said that they need to be very flexible and not start creating the anticipation that the exit is in the next few weeks, months.
