ECB struggles with inflation: To tape or not?

Like many other central banks, the ECB is also struggling with the tapering of its bond-buying programme. Now that the economy is growing again and inflation is skyrocketing, the central bank must do something to prevent the economy from overheating. That is why the market is now looking closely at the bond-buying programme, because it is the central bank's use to keep interest rates low. Since the start of the coronavirus pandemic, central banks in the eurozone have already bought more than €1,500 billion in government bonds. As a result, the credit risk on government bonds is close to zero, with the side effect that even countries such as Italy and Greece can borrow for free.

At a press conference in September, the ECB announced its intention to to be phased out. To date, however, little has come of this. Central bank figures show that it still buys about €70 billion worth of bonds a month. That is more than in the same period last year, suggesting that the central bank is not yet in such a hurry to taper its bond-buying program. Lagarde already warned against adjusting monetary policy too quickly, a mistake that the central bank also made in 2011. It then raised interest rates in two steps, after which the European debt crisis erupted.

Monthly purchases of government bonds by the ECB

Fragmentation in the euro area

The ECB is therefore reluctant to taper its asset purchase programme. And that is understandable in a way, because the risks of a too rapid rise in interest rates are huge. Unlike the Federal Reserve and the Bank of England, the ECB has to tailor its monetary policy to 19 different countries. While countries such as Germany and the Netherlands have been pushing for a tightening of monetary policy for some time, countries such as Italy and Greece fear the consequences. Their gigantic public debt of 156% and 205% of their GDP respectively could quickly become a problem if the market loses confidence.

Large interest rate differentials between government bonds of different euro countries are a nightmare for Lagarde. It could trigger a new European debt crisis. In recent days, we have seen the interest rate differential between government bonds of Italy and Germany widen further to 1.46 percentage points. That's the highest level since September last year and more than 30 basis points more than two months ago. It is therefore not surprising that the ECB is already working in the background on a Alternative buy-back program. In doing so, it has an instrument in its hands to intervene in times of stress on the financial markets. With this new program, it will be able to buy bonds of problem countries in an emergency.

The ECB has already bought more than €1,500 billion since the corona crisis

What's next?

The ECB does not want to taper its bond-buying programme too quickly, let alone raise interest rates. That is why the central bank is looking for all kinds of excuses to speed up the tapering process as much as possible. to slow down. Last summer, the ECB broadened its inflation target by raising inflation rates. tolerate. And now that inflation is sky-high, the central bank says this is only a temporary phenomenon. It certainly does not do the credibility of the central bank and its monetary policy any good.

As we wrote earlier, savers are currently paying the bill for the corona crisis. They no longer receive interest or even have to pay interest to their banks, while inflation in the eurozone is already 4.9% year-on-year. In the Netherlands, inflation is even higher at 5.6%. The purchasing power of savers is melting away. As a result, alternatives such as investing in shares and buying gold are becoming increasingly interesting. Currently, real interest rates are strongly negative, which historically favourable is for the precious metal.

This contribution comes from Geotrendlines