On Thursday, April 14, 2022 the European Central Bank met to decide on the policy to be adopted for the coming months. Many actors remained intrigued by the position adopted by the ECB.

The current situation

The war in Ukraine as well as the various sanctions against Russia are obviously the main causes of this deafening rise of the inflation. In addition, tensions are being felt in the supply chains due to the various confinements in China. In France, the inflation rate reached 7.5% in March over one year, the ECB target being 2%, the meeting of this Thursday was very expected to give a guideline to the financial markets and to the banks.

ECB urges caution

Because of this high inflation, it was predictable that the ECB would opt for an immediate and severe rate increase. However, Christine Lagarde explained that the causes of inflation being mainly imported, it is not wise to adopt a strict policy without having an outline of the consequences of the war in Ukraine on French economic growth.

While the central bank has not chosen a radical rate hike, it has decided to continue its momentum towards normalizing its monetary policy and thus gradually soften the interventionism put in place to fight the fallout of the Covid-19 crisis. In this sense, the ECB has announced to progressively reduce its envelope for asset purchases that was established under the Asset Purchase Program (APP). As a reminder, this program is a non-conventional tool that allows the ECB to massively buy different securities and bonds with the aim of lowering interest rates and raising inflation. The monthly envelope, which is currently 40 billion euros, will be reduced to 30 billion in May and 20 billion in June. The central bank will then wait for the June meeting to decide on the fate of this program and possibly end it. According to Christine Lagarde, the end of the purchases would precede an increase in key rates, which for the moment are -0.5% for the deposit rate, 0% for the refinancing rate and 0.25% for the marginal rate. However, the market seems to be disappointed by these announcements and the euro-dollar exchange rate is down sharply. 

A tightening of rates for the FED

In the United States, the Federal Reserve of the United States (FED) has started since March to increase the key rates, from 0% to 0.50% and a new increase at the beginning of May would be considered. The objective is to approach a neutral rate between 2% or 2.5%, which means a rate that would have no effect on an economy in equilibrium. The FED is looking for a rate that would curb inflation but would not restrain the economy and therefore growthbut some governors believe that such a direct policy will make it difficult to avoid a recession. The Bank of England has also started to raise rates.

Doves and hawks

Within the various central bank councils, the debate is between the "hawks" and the "doves". The opposition of these two "camps" is historical and reawakens with each insecurity. The doves advocate flexibility and do not want to prevent a resumption of growth, despite inflation reaching record highs. The hawks, on the other hand, would like to see strong measures to fight inflation, by fear that it will take hold and will no longer be linked to wartime conditions. 

In conclusion

If inflation is the order of the day in France as well as in the United States, it is important to note that a large part of it is due to the price of fuel and foodstuffs, Russia and Ukraine being important exporters of wheat and oil. If the ECB questions on its policy, Europe may feel the consequences of the war in Ukraine more violently than the US. Markets fear stagflation as a result of this crisis, which may explain the Governing Council's wait-and-see attitude. The Bank of France has corrected its position on the GDP growth of the first three months of the year, the announced growth is 0.25% against 0.50% previously.

Wealth A7 keeps itself informed of European and global monetary policies to provide you with informed advice.

In a world that moves, Wealth A7 is there to bring your desires to life.