At its monetary policy meeting on 14 April 2022 in Frankfurt, the Governing Council of the European Central Bank acknowledged that inflationary risks were increasing, particularly in the short term, and opened the door to an end to its accommodating policy.
The ECB is continuing its “normalisation process” in a “gradual way, keeping all options open and with flexibility”, stressed ECB President Christine Lagarde, who was speaking remotely, having tested positive for Covid-19.
The Governing Council now states more firmly, but conditionally, that a halt to asset purchases under the APP (Asset Purchase Programme) could be envisaged for the third quarter of 2022, depending on the data and the Governing Council’s assessment. In the meantime, monthly net purchases under the APP will continue at a rate of €40 billion in April, €30 billion in May and €20 billion in June.
Policy rates remain unchanged to date and no increase has been announced. However, according to the “sequencing decided by the Governing Council, the end of quantitative easing is a precondition for any increase in ECB policy rates that may occur some time afterwards”.
Following the discontinuation in March of the Pandemic Emergency Purchase Programme, PEPP (see EUROPE 12855/8), the ECB reaffirms that it will be able to exercise flexibility in reinvesting in the PEPP. The Governing Council did not take a decision on the TLTRO III targeted refinancing operations.
The Russian military aggression against Ukraine “is not only causing a huge humanitarian crisis, massive economic damage and costs and risks far beyond Europe”, said President Lagarde. This war and the sanctions in response to Russian aggression are having macroeconomic consequences in the euro area, the extent of which cannot yet be measured. This will depend on many factors.
“Inflation is our main concern”, the President stressed, “because of its magnitude and possible impact in terms of the second round effect”. Inflationary pressure has increased in 2022, driven upwards mainly by soaring energy prices. The annual HICP inflation rate rose from 5.9% in February to 7.5% in March 2022 in the euro area. Energy prices are expected to remain high in the short term and then continue to rise more moderately. The demand resulting from the reopening of the economy contributes to this increase. Food prices are rising more broadly, driven by energy prices, transport prices and, due to the invasion of Ukraine, fertiliser prices.
In the medium term, inflation could move closer to the ECB’s [symmetric] 2% target, she stressed, “probably from above rather than from below” and “the first signs of a revision in long-term inflation deserve attention”, which could be in line with a more aggressive monetary policy. The President added that the Governing Council will have better data at its June meeting. In its risk assessment, the Bank does not rule out peaks above its 2% target in the medium term.
Growth in the euro area is expected to remain moderate in 2022. It is affected by various factors: the war in Ukraine and new tensions on supply chains and production. However, these factors are partly offset by fiscal measures put in place by governments and by the savings made by some households during the pandemic. The President stressed the usefulness of implementing national plans under Next Generation EU to accelerate the green and digital transition and the need for fiscal and monetary support.
The situation on the employment front seems to be improving. Wage growth is a particular focus in this context.
On the subject of bank lending, the President mentioned the latest Bank Lending Survey, published on 12 April. Respondents report a tightening of credit terms and conditions for businesses and households, but not yet in terms of rates or volume. However, they expect a credit crunch.
The President stressed the need to remain humble: “An event such as a war poses a huge challenge to build projections”.
However, this meeting was not a projection exercise, but an interim meeting, said Ms Lagarde, who is looking forward to the next Governing Council meeting in June 2022.
Aware of the risks of fragmentation in the euro area, she said: “We need to ensure that our monetary policy is transmitted equally across the euro area”.
She also stated that the ECB stands ready to take any action necessary, including the establishment of appropriate instruments and, “if necessary, this will be quick and operational”.
Link to the ECB’s April 2022 monetary policy decisions: https://aeur.eu/f/1a2 (Original version in French by Émilie Vanderhulst)