Worried about inflation, European Central Bank reduces monetary support

Despite the Russian invasion in Ukraine, and taking observers by surprise, the ECB wants to end its purchases of assets in the third quarter.

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Christine Lagarde sported a yellow and blue pin and expressed his “full support for the Ukrainian people”. But the President of the European Central Bank decided, Thursday, March 10, to continue the “standardization” of monetary policy as if the Russian invasion had not occurred.

She announced that the ECB would progressively put an end to its policy of assets on the financial markets: about 60 billion euros per month currently, the institution of Frankfurt will increase to 40 billion in April, 30 billion in May and 20 billion in June. The goal is to completely end the third quarter. An increase in its key rate could arrive “Some Time Later” (“a little later”).

If the ECB manages to cease its asset purchases, it would be the end of a long interventionist period: it began to buy the debts of the states in 2014 and has not ceased since (with the exception of a period of eleven months in 2019). As for the interest rate, it has been negative since 2014, and – 0.5% since September 2019.

The ECB was stuck between two contrary effects. On the one hand, the Russian invasion, causing a vast increase in the price of raw materials, will give a blow to growth. On the other, it will increase inflation. In front of the two dangers, the Board of Governors, composed of the six members of the Executive Board and the nineteen governors of the central banks of the euro area countries, was divided. “The discussions were very intense”, recognizes M me Lagarde. But in the end, inflation worries have swept away.

3,7% growth in 2022

M me Lagarde explains this decision on the basis of the new official forecasts of the ECB, which provides 3.7% growth in 2022, which remains extremely strong. Of course, the Russian invasion is going to have a negative economic impact, but at the same time, the pandemic seems almost ancient history and sanitary restrictions are gradually disappearing. In addition, state support has been strong for the last two years, and many households have accumulated savings.

Conversely, the signals around inflation are alarming, estimates the ECB. The price index in euro zone was already up 5.8% in February, it will continue to increase the next few months. In total, it should reach an average of 5.1% throughout the year. It is well above the Central Bank’s mandate, which plans to maintain 2% long-term inflation.

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/Media reports.