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ECB Wrestles With Record Inflation & War Risk

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by Sebastien Ash

European Central Bank policymakers meet on Thursday faced with the challenge of threading a response between record-high inflation figures and weak growth due to the war in Ukraine. Online News

The bank’s 25-member governing council gathers for the second time since Russia launched its invasion at the end of February, with the outlook for the eurozone economy still murky.

At its meeting in March, the ECB sped up the wind-down of its bond-buying programme, raising the possibility of a complete stop as soon as July.

A move towards interest rate rises would follow “some time” after that — a time frame which could be a “week after” or “months later”, according to ECB President Christine Lagarde.

But calls for the ECB to act faster have grown louder as prices have continued to spiral, with the war in Ukraine sending the costs for energy, commodities and food upwards.

Inflation in the eurozone hit 7.5 percent in March, an all-time high for the currency bloc and well above the central bank’s own two-percent target.

Meanwhile, surging prices for oil and gas, as well as the added disruption for supply chains, threaten to drag on the economy.

The high degree of uncertainty means the ECB will likely tread carefully. Thursday’s meeting would not produce an “Easter egg”, said Holger Schmieding, economist at Berenberg Bank.

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“Expect a lively debate but no major decision yet.”

  • ‘Further steps’ –

Observers will be listening closely to Lagarde’s press conference at 1230 GMT for clues as to how the ECB might respond next.

European Central Bank in Headlines & Online News
The new European Central Bank (ECB) Building in the East end of Frankfurt in front of the skyline, Germany. February2014.

Among the things they will be listening for are “a further hint that the ECB may raise rates later this year”, Schmieding said, a policy pushed for by more “hawkish” governing council members.

Joachim Nagel, the head of Germany’s traditionally conservative central bank, has cautioned against “acting too late”.

Any hike would be the ECB’s first in over a decade and would lift rates from their current historic low levels.

The Frankfurt-based institution even set a negative deposit rate of minus 0.5 percent, meaning banks pay to park excess cash at the ECB.

Central bankers use interest rate rises as a tool to tame inflation, but pulling the trigger too soon risks hurting economic growth.

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Minutes from the last ECB meeting revealed that many members of the governing council wanted “immediate further steps” to tackle inflation despite the darkening economic picture.

The Bank of England, the US Federal Reserve and the Bank of Canada have already moved on rate hikes, leaving the ECB looking out of step.

Carsten Brzeski, head of macro at ING bank, said he saw the ECB’s rates exiting negative territory “at the latest around the turn of the year”.

  • Old predictions –

The ECB’s prediction that inflation would even out at 5.1 percent over the course of 2022 was “already outdated”, Brzeski said.

The persistence of high energy costs and the potential for new sanctions that could further limit supplies from Russia could drive the monthly figure into “double-digit” territory.

Soaring energy prices would also saddle businesses and consumers with higher bills and “weigh on economic activity in the coming months”, Brzeski said.

Over recent years, the ECB has hoovered up billions of euros in government and corporate bonds each month to stoke the economy and keep credit flowing in the 19-nation currency club.

While the stimulus is being phased out, the advent of a fresh crisis has some speculating about the possibility of the ECB designing a new tool to contain the impact of the war.

The “geostrategic” programme would counter the risk of borrowing costs rising for certain countries in the eurozone that would make it harder for them to finance their response to the war, said Eric Dor, a director at the IESEG business school.

Signalling a willingness to use the new tool could be “sufficient” to keep costs low, Dor said, though it was probably “too early” for it to be launched.


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Notes from APS Radio News

During the past few years, a number of the world’s central banks have engaged in massive programs of monetary expansion, even as jobs and businesses were lost by way of virus-related restrictions and quarantines.

For example, beginning in March of 2020, the US Federal Reserve engaged in a substantially greater program of monetary expansion by purchasing hundreds of billions of dollars of Treasury and corporate bonds.

Since the early part of March 2020 to date, the Federal Reserve has added over $4 trillion to its holdings.

In particular, whereas on or about February 24, 2020, the holdings of the Federal Reserve stood at $4.2 trillion, on or about January 17, 2022, the holdings of the Federal Reserve stood at about $8.9 trillion.

As well, the Federal Reserve has kept interest rates low.

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Recently, Jerome Powell, the head of the Federal Reserve, said that he wasn’t concerned about inflation and that, for the none, the Federal Reserve would keep interest rates at low levels.

Another examples is that of the Bank of Japan.

According to Fred Economic Data, as of October 2021, the Bank of Japan’s holdings were about $6.4 trillion or about 725 trillion Yen.

In the early part of March 2020, the Bank of Japan’s holdings were $5.3 holdings. During the period mentioned, the Bank of Japan added over one trillion dollars to its holdings.

A number of corporations have been borrowing money inexpensively and have been purchasing their own shares of stocks, increasing share prices of stocks.

Still, there are concerns among investors.

A number of them have expressed concerns about central banks’ eventually increasing interest rates, as, during the past year, inflation levels have been increasing.

The combination of low interest rates, expansive monetary policies, fiscal stimulus programs, which themselves have infused trillions into the US economy, and shortages of goods and services caused by virus-related restrictions and lockdowns has increased levels of inflation.

Investors also worry, for example, about announcements recently made by Toyota and VW; those companies have announced that because of shortages of particular types of material, they will be reducing levels of production.

Some weeks ago, the results of a survey of UK manufacturers were released.

That survey indicated that many businesses in the UK are concerned about shortages of supplies and will be making necessary adjustments.

In general, jobs and businesses have been lost by way of mandates, restrictions and quarantines, which, in their turn, were imposed by way of the virus narrative.

In the US, overall, the mortality rate of the virus is about .069%, according to Statista, an award-winning service.

The recovery rate is over 99% for most age groups.

What has followed in the wake of lockdowns and mandates has been the infusion of trillions of dollars into the US economy, the increasing succeess of online businesses like Amazon and other large online retailers, various bank and tech-related stocks, the shuttering of small to medium-sized businesses and the loss of millions of jobs.

Another result has been the increasing levels of inflation, especially those of food and fuel.

In official terms, for purposes of reporting, the US Labor Department uses what is called “core inflation”.

Core inflation excludes items like food and fuel, as those are deemed too volatile.

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