A fairy tale about the change in the ECB rate
Surprisingly, even the uncertain ECB is now raising a restrictive flag. A change in interest rates has been announced and liquidity donations are no longer being distributed. It sounds like a wind of change, after a significant shift in the course towards normality and stability of monetary policy. But the doubts are more than appropriate.
The last rate hike of the ECB took place 11 years ago. But now it’s time again. Due to the dramatic inflationary pressure, the ladies and gentlemen of monetary policy who had waited so far could no longer sit and rest. Our central bank is even showing a road map of stability. A key interest rate twist will be announced at the June meeting, which could become reality at the meetings in July, September, October and December with interest rate hikes of 0.25 percentage points. In September, an increase by 50 basis points is also possible. Overall, the key interest rate would be around 1.25 percent at the end of 2022. At the same time, the ECB cuts off the liquidity tap.
Apparently, the ECB has joined the club of restrictive central banks. After many trials and tribulations, the ECB suddenly remembers the mandate for price stability. It sounds like a construction break. The prodigal son, or rather the daughter, regains his sanity.
I hear the words well, but I lack faith
But always slowly with the decomposition of the laurels of stability. Just as a little tidying does not clean the flat, a little pay raise is not a stability policy. The question is not whether interest rates will rise, but by how much. We do not yet know what the ECB’s interest rate policy will be from 2023, but if we look closely at its work over the past few years, it is difficult to suggest a radical change in monetary policy. The ECB will remain Europe’s social worker.
First of all, an economically and structurally weak Europe, dependent on raw materials and exports, can tolerate lower interest rates than a better-positioned United States with a high degree of self-sufficiency. And as Europe is even closer to the Ukrainian crisis point, it is generally more at risk of recession than the country on the other side of the Atlantic.
Overall, the ECB does not have the advantage of the US Federal Reserve of only having to look after Uncle Sam. The EBC has many protected daughters and sons who are very different. If the ECB were solely responsible for interest rate policy for Finland, the Netherlands, Austria or Germany, we would have had other, much higher interest rates a long time ago.
When the monetary imperative economy goes away, the market economy comes back in catastrophic fashion
The European chain is only as strong as its weakest link. And there are some countries with weak muscles. If the corset of support for the planned monetary policy economy were completely taken from them, many of the excessively indebted countries of the Romansh Eurozone would find themselves in serious financial trouble. If, for example, the flood of liquidity dried up, ie if factors such as creditworthiness were to decide government bond prices again, their interest rates would rise like helium balloons at a children’s birthday party. Your artificially created happy hour for financial stability by the ECB would be jeopardized.
In fact, representatives of the southern euro countries fear that an overly restrictive interest rate and liquidity policy of the ECB could threaten their artificial financial stability.
There is already a divergence in interest rates in the financial markets. Other European countries’ risk premiums doubled in six months compared to German 10-year government bonds. The separation of Italy is particularly striking.
Better more inflation than less peace in euros
If this development were to continue, in extreme cases there would be a risk of another debt crisis. Faced with this existential risk for Europe, the ECB will pursue a “constructively ambivalent” monetary policy in the future.
What sounds very academic on closer inspection is blasphemous: yes, some kind of rate hike policy, but no, just don’t overdo it. More inflation is the price for “a little room in euros.”
Incidentally, if the ECB stops pumping new liquidity into the financial markets, that sounds worse than it is. Record levels of money supply remain as the income from maturing interest-bearing securities is reinvested many times. It would also be a possible tool to prevent bifurcation of domestic interest rates. The ECB could become obsessed with allowing, for example, amounts from maturing German bonds in favor of southern European interest-bearing securities.
Then we are no longer talking only about a planned economy, but about the socialism of interest rates. The ECB will not fail countries even without reform efforts. The principle of efficiency is likely to continue to be trampled on in the future, which means a creeping death for the economic region.
Regardless of this, the commitment to stability is also weakening in the strong countries of Europe. In Germany, for example, it is proclaimed that the welfare state must improve in word and deed. It is a nice paraphrase of the demand for a larger state economy. Who’s gonna pay the bills?
Despite interest rate cosmetics, the ECB remains the political errand boy. There is no longer any room for a clear shift of the course towards the normality of monetary policy or even price stability, at best for a halo of illusion.
And if he doesn’t die, the ECB saves today, tomorrow and the day after tomorrow.