New round table at the Kriegsspiel of the ECB concerning the purchase of bonds
The Governing Council of the European Central Bank faces a major cohesion test over cutting government bond purchases in the fourth quarter as part of its $ 1.85 billion emergency purchase program euros in the event of a pandemic, 70% complete.
The September 9 meeting of the 25-member group heralds a new round in a psychological battle between the pro-stricter policy minority and the ECB’s board with their supporters among the council’s other central bank governors.
In a calibrated but robust manner, the hawkish faction of the council will seek to argue that Christine Lagarde, the President of the ECB, should seek unanimity rather than a majority opinion to reduce PEPP volumes from the recent 80 billion. euros per month. The first price would argue for a larger reduction in asset purchases than the relatively small fourth-quarter reduction proposed by ECB economists and market strategists (see the ECB Strategy Debate by Iain Begg and others in the latest OMFIF podcast). The tighter silver group is hoping Lagarde will want to make the ability to chair a united council a key feature of his presidency, unlike his often autocratic predecessor Mario Draghi.
The September 9 decision, which will be accompanied by an upward revision of the ECB’s inflation forecast for the next two years, will provide an important signal that the PEPP expires or continues beyond the date. current target, end of March 2022. A decision on this will be taken in December. Some of the tightest monetary groups, notably the governors of the German, Austrian, Dutch and Belgian central banks, are resigning themselves to the prospect of an extension.
This despite signs that Europe has resisted the pandemic, with euro area activity expected to return to pre-Covid levels by the first quarter of next year. The euro zone’s inflation rate rose to 3% in August, in part due to factors related to the pandemic. Most economists (including hawkish-leaning central banks) predict price pressures will ease next year. But hawks believe the PEPP triggers more negative than positive effects and ignores increases in core inflation as well as tightening moves in other central banks led by the US Federal Reserve.
According to a path mapped out by Philip Lane, a member of the ECB’s board of directors for the economy, the ECB enters the fourth quarter with a higher underlying bond buying rate than in the third quarter of the ‘last year. PEPP volumes, already higher in July than in July 2020, showed a seasonal month-over-month decline of just 26% in August, down from 30% in August 2020, although this may reflect factors market rather than a deliberate policy.
In addition to the half-dozen board members skeptical of the ECB’s accommodative policies, five others are said to be leaning in this direction. That’s not enough for a majority decision, but enough to whip up the nuisance value against Lagarde. The individualistic nature of the decision-making of the ECB board members and the links with the economies of their states have been growing academic analysis.
The President of the ECB, benefiting from a sharp negotiating know-how as an international jurist, French Minister of Finance and Managing Director of the International Monetary Fund, tried to adopt a more collective approach than Draghi. She showed much more patience and understanding with Jens Weidmann, the President of the Bundesbank, the unofficial, soft-spoken leader of the Hawkish group.
The closer faction won a partial victory on July 8 when Lagarde announced unanimity on relatively restrictive terms to possibly surpass the 2% inflation target in the years to come. However, in a decision that owed much to negotiations between Lagarde and Weidmann, the board split its July 8 decision on the comprehensive approach to inflation from a separate decision on “forward guidance” for the rate hike. interest decided by majority “consensus” on July 22. As the resulting ECB meeting minutes showed, the Hawks expressed concern that the elaborate conditions * limiting the scope for an interest rate hike amounted to a de facto easing of the position of the ECB.
By failing to agree on a package deal combining a long-term strategy and shorter-term interest rate tactics, Lagarde and Weidmann left open the possibility of a long-standing Kriegsspiel stretch. of the ECB Council. Although conducted like a central bank, the skirmish is far from over.
David Marsh is President of OMFIF.
*ECB press release: “In support of our symmetrical inflation target of 2% and in line with our monetary policy strategy, the Governing Council expects the ECB’s key interest rates to remain at their current levels or lower until inflation reaches 2% well before the end of our projection horizon and sustainably for the remainder of the projection horizon, and we believe that the progress made on core inflation is sufficient advanced to be compatible with a stabilization of inflation at 2% in the medium term. It may also involve a transitional period in which inflation is moderately above target. ‘