ECB in a dilemma: inflation and concerns about the economy

Created: 03/10/2022Updated: 03/10/2022 09:52

The European Central Bank in Frankfurt am Main.

© Frank Rumpenhorst/dpa

The departure from the anti-crisis course seemed within reach - now the Ukraine war could mess up the schedule.

It will be difficult for the ECB to set the right course.

Frankfurt/Main - High inflation and new uncertainties for the economy: The mix could not be less favourable.

The European Central Bank (ECB) actually seemed ready to herald the end of the ultra-loose monetary policy at its meeting this Thursday.

But the Russian war against Ukraine harbors new risks for the economy, which is just recovering from the corona pandemic.

This makes it difficult for the ECB to scale back its bond purchases.

The central bank will announce the decisions of the Governing Council in Frankfurt in the afternoon.

Ukraine war interrupts recovery trend

Above all, rising energy prices are keeping inflation at a high level.

In Germany, the annual inflation rate climbed back above the five percent mark at 5.1 percent in February.

In the euro zone, consumer prices in February were 5.8 percent higher than in the same month last year.

This is the highest value since the euro was introduced as a settlement currency in 1999. The ECB is aiming for a stable currency with a price level of 2 percent in the medium term.

Higher inflation rates reduce the purchasing power of consumers, they can then afford less for one euro.

According to calculations by the Institute for the World Economy (IfW), the war in Ukraine caused world trade to collapse within a few days.

For February, the Kiel economists are assuming minus 5.6 percent: "This is the biggest slump since the outbreak of the Corona crisis in spring 2020. The recovery trend of the last few months has thus been abruptly interrupted."

ECB Executive Board member Schnabel: Have to find a balance

Even before the war broke out, ECB Executive Board member Isabel Schnabel had shown how difficult it is for Europe's monetary authorities to find the right balance: There is both a risk of acting too early and a risk that the ECB will act too late: "We We have to find the right balance between these two risks.” At the beginning of March, Bundesbank President Joachim Nagel, who has been in office since the beginning of the year, once again referred to persistently high inflation: “We have to keep an eye on the normalization of our monetary policy.” The war in Ukraine could, however, delay the gradual exit from the expansive monetary policy.

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In any case, the ECB has already decided that it will only raise interest rates when it is no longer investing fresh money in the purchase of government and corporate bonds.

The key interest rate in the euro zone has been at a record low of zero percent for six years now.

Banks that park funds at the ECB have had to pay interest on them since June 2014. This deposit rate - known in technical jargon as the deposit facility - is currently minus 0.5 percent.

A number of financial institutions pass the costs on to their customers.

With regard to bond purchases, the Governing Council of the ECB has so far only decided that the central bank will only buy additional securities until the end of March 2022 as part of its PEPP bond purchase program launched during the corona pandemic.

However, according to previous planning, billions should continue to flow through the general purchase program APP.