After eurozone inflation peaked at 7.5% in March, the European Central Bank (ECB) and bank president Christine Lagarde explained Thursday that the central bank’s bond purchases would stop in the third quarter. Reiterating what she said at a press conference in Cyprus two weeks ago, Lagarde stressed Thursday that inflation “will remain high in the coming months.
The European Central Bank plans to end its asset purchase program in the third quarter
The Eurozone is suffering from significant inflationary pressures as rising consumer prices are bankrupting European Union (EU) residents. In March, ECB data showed that consumer prices jumped to 7.5%, and ECB President Christine Lagarde expected energy prices to “remain higher for a long time.” On April 14, ECB members met and then told the press that the central bank plans to end its asset purchase program (APP) by the third quarter.
“At today’s meeting, the Governing Council decided that incoming data since its last meeting strengthen its expectation that net asset purchases under the APP should end in the third quarter,” the ECB told the press. Once the APP is complete, the bank is expected to begin raising its benchmark bank rate. However, according to Lagarde, this will depend on what happens with the current war between Ukraine and Russia.
Improving the EU’s economic situation, Largade said, “will depend crucially on how the conflict unfolds, the impact of the current sanctions, and possible further measures.” The central bank’s announcement Thursday stressed that benchmark bank rates will not change until the end of the APP. “Any adjustments to the ECB’s key interest rates will occur some time after the end of the Governing Council’s net purchases under the APP and will be gradual,” the ECB said in a statement.
Fidelity International Global Macroeconomist: ECB faces “tough political compromise”
Following the ECB and Largade statements, gold bug and economist Peter Schiff added his two cents on Twitter that the central bank will keep rates low. “The ECB has announced that interest rates will remain at zero until it judges that inflation will stabilize at 2% over the medium term,” Schiff tweeted“Inflation in the Eurozone is currently at 7.5%. How can you put more gasoline on the fire to put it out. Europeans are stuck with inflation well above 2% indefinitely.” Schiff continued:
The dollar is rising against the euro because the Fed is still pretending to fight inflation and the ECB is still pretending that inflation is transitory. Once both banks stop pretending, the dollar will fall against the euro, but both currencies will collapse against gold.
Speaking with CNBC on Thursday, Fidelity International global macroeconomist Anna Stupnitskaya said the European Central Bank is facing a “tough policy compromise.” “On the one hand, it is clear that the current policy stance in Europe, with interest rates still in negative territory and the balance sheet still rising, is too easy for high inflation, which is becoming increasingly broad-based and entrenched,” Stupnitskaya observed after the ECB’s statements. The Fidelity International economist added:
However, on the other hand, the eurozone is facing a huge growth shock, simultaneously caused by both the war in Ukraine and a blow to Chinese activity because of the zero-rate policy. High-frequency data already point to a sharp decline in eurozone activity in March-April, with consumer-related indicators a cause for concern.
What do you think about the ECB’s explanation that bond purchases will stop in the third quarter and the discussion about raising the benchmark bank rate. Let us know what you think about it in the comments section below.
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