The ECB is not moving

That inflation, i.e. currency devaluation, is a kind of tax may be a “truism”. And yet it is true. Unlike a tax, however, it does not affect everyone equally; it hits the poorest sections of the population in particular. Energy cost subsidies for housing benefit recipients and other things don’t help either.

At the beginning of February this year, the inflation rate in the euro zone was still 5.1%. At the end of March 2022, it jumped to 7.5% on average. This is the highest level since the introduction of the euro.

In four eurozone countries, the rate is now in double digits. According to Eurostat, it is 14.8% in Estonia, 15.6% in Lithuania, 11.2% in Latvia and 11.9% in the Netherlands. Germany registers 7.6 percent.

In February this year, the ECB still expected inflation to fall during the year, i.e. with a temporary phenomenon, and was of the opinion that inflation was driven by “factors specials”. The monetary authority is currently expecting prices to rise by 6.0% in 2022, as announced on Friday. How to achieve this given the expected wage-price spirals remains at least a mental exercise.

The ECB homepage reads: “The primary objective of the ECB is to maintain price stability. We work for the citizens of the euro zone and ensure that the value of the euro is preserved. And further: “Stable prices are the best contribution that monetary policy can make to economic growth.

There can be no question of it. The board met before Easter. The ECB struggled with its decision on interest rate policy; rather, she did nothing. The Board decided to leave the policy interest rate at the previous level of zero percent. A turnaround in interest rates is therefore apparently not in sight. The ECB does not seem to read the signs of the times.

The ECB’s bond-buying program called APP, i.e. the transfer of public debt “securities” to the ECB’s balance sheet, “should be 40 billion euros per month from April and then fall to EUR 30 billion per month in May and then EUR 20 billion in June,” writes the Handelsblatt. “The data received since the last ECB Governing Council meeting in March has ‘reinforced the expectation that net bond purchases should be completed in the third quarter,” according to the central bank’s statement. “The longer the ECB sticks to its very accommodative monetary policy, the more people’s inflation expectations rise and very high inflation becomes permanent,” Commerzbank chief economist Jörg Krämer said.

It is also a “truism” that the ECB, as a central bank, buys government bonds or corporate bonds from banks, thereby increasing the amount of money in circulation. If more money comes into circulation, the economy recovers and inflation rises. This is also called “money printing”.

At the end of August 2021, the total assets of the ECB amounted to approximately 8.2 trillion euros. This represents around 80% of the gross domestic product of the euro zone. At the end of December 2021, the euro zone was in debt at 100% of GDP. The euro zone is farther than ever from the stability pact, which sets a target of 60%.

But back to the devaluation of money called inflation. The ECB is doing too little, in fact nothing at all, to at least slow inflation. It has still not finalized the purchase of securities and will probably not finalize it until the end of the third quarter of 2022. Key word: probably.

In our neighbor Switzerland, the rise in prices is also a matter of debate, even if the rate remains at 2.4%. The economists’ dispute is as follows: is there a risk of inflation in Switzerland reaching US or European levels in the medium term?

While a nominal appreciation of the franc is expected in Switzerland, the eurozone currency is falling. “After the monetary watchdogs again left themselves open to act against inflation with higher interest rates, the euro fell to its lowest level in almost two years”, namely below the 1.08 mark, reports Die Welt. It has to do with the fact that the ECB said it would “eventually” raise interest rates – after the end of the bond-buying program. “A weak euro increases inflationary pressure because most commodities are traded in dollars, making it more expensive to buy.”

Meanwhile, Deutsche Bank vice warns of double-digit inflation. “Our forecast is that we will be at an inflation rate of seven to eight percent during the year,” Karl von Rohr explained in the Sunday newspaper Frankfurter Allgemeine (FAS). “If energy imports were more severely restricted, we could even see ten percent and more.” And further: “Wealth melts like ice in the sun.” unheard of since the 1970s.”

Regarding the interest rate policy of the European Central Bank (ECB), von Rohr said he saw interest rate hikes as “urgently needed” “so that inflation expectations do not solidify at a high level”. Decision of the Council by the ECB, it does not seem to come out of it at all. The path to “galloping inflation” seems clear.

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