Updated on Thursday, 9 September 2021 – 01:38
Even though inflation has risen to 3% In August, the highest level in the last ten years, the bank expects it to moderate in the medium term
Christine Lagarde, President of the European Central Bank Guillaume HorcajueloEFE
Is it time to begin to withdraw the financial stimuli planned to counteract the economic effects of the pandemic? It is the debate that they will have the members of the Governing Council of the ECB. The decisions and the message that you convey later Christine Lagarde, president of the bank, they will modify the strategies of investors.
For the first time since it launched the emergency asset purchase program to fight the pandemic –PEPP for its acronym in English-, The ECB may announce today a cut in the monthly volume of purchases of public and private debt.
The current environment poses various challenges to the monetary policy path, with both upside and downside risks for European assets and the region’s financing conditions, they note in Monex Europe.
In this sense, the initiation of the PEPP reduction will be the first step in this change in strategy. Currently the ECB allocates 80,000 million euros a month to this program, a volume that is likely to be lowered at Thursday’s meeting, says Germn Garca Mellado, from A&G Private Banking. Almost all analysts consider that today reducing them to 60,000-70,000 million.
The ECB’s mandate is to keep inflation under control in the 2% in the euro zone. Therefore, the evolution of prices is the first condition that must be evaluated in order to establish monetary policy.
The problem is that inflation has risen to 3% in the month of August, the highest level in the last ten years, and this has made members of the ECB nervous in favor of tightening monetary policy. If transitory factors lead to higher inflation expectations and an acceleration in wage growth, the inflation rate could rise noticeably in the long run, it stated last week. Jens Weidmann, President of the Bundesbank.
Although it is very likely that the ECB will announce today an increase in growth forecasts for the economy, there are still risks that indicate that the crisis is not over at all. There is uncertainty about the long-term efficacy of vaccines and the emergence of new strains, such as this summer’s delta variant. Therefore, the decision on the route of the PEPP at this time is not trivial, since a very early reduction could harden borrowing costs in an unsustainable way, they add in Monex.
The dilemma facing the ECB today is whether to initiate a path towards a more orthodox monetary policy – reducing extraordinary stimuli or, in other words, begin to remove the crutches from the European patient – because it considers that recovery is already a fact and maintain them It can overheat the economy and trigger inflation. Or, on the contrary, continue for a time that relaxed monetary policy considering that the crisis has not yet gone away and the patient remains prostrate.
Although inflation is at levels not seen in recent years, the central bank itself will say today that it foresees a moderation in the medium term. The ECB is now firmly focused on the persistence and sustainability of its monetary policy measures and not so much on reaching the inflation target within a reasonable horizon, it says. Konstantin Veit, Pimco portfolio manager.
Although a rise in interest rates is not at all on the horizon, the error of the surprise increase decreed in April 2011, when the bank then chaired by Jean Claude Trichet, I went up from one to 1.25%rates to curb inflation, which had been located in the 2.6%. A decision to halt the recovery that began after the 2008 financial crisis. Ultimately, it’s like in the seven-thirty game: if you fall short, you can lose or win, but if you overshoot, you’ve surely lost.
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