ECB Insight: Decision Not an Acceleration, 'Putin Emergency Purchase Programme' an Option if Needed

11 March 2022

By David Barwick – FRANKFURT (Econostream) – The European Central Bank Governing Council’s decision on Thursday should be understood less as an acceleration than as a logical response to an array of macroeconomic factors inconsistent with the present policy stance, in the view of one insider who spoke to Econostream.

‘No’, an insider responded to Econostream’s assertion that Council members probably see yesterday’s decision as an acceleration, despite ECB President Christine Lagarde’s claim that it was not.

The decision represents at most ‘an accelerated return to where we were supposed to be just a couple of months ago’, he said.

The current level of accommodation made little sense with repeated upside inflation surprises in many countries of the area, above-target HICP this year and ‘very, very likely’ next, pre-pandemic unemployment rates and - though opinions differ in this regard - possibly rising inflation expectations, he argued.

‘You don’t see a pickup in wages, which are still quite subdued, but there is a risk that wages start growing again also’, he added. ‘You see economies returning to full capacity. I wouldn’t call the unconventional stimulus currently provided appropriate. I think it’s the right time to step away from these measures.’

The ECB thus made a ‘very good’ and ‘timely’ decision, he said. ‘I think it was very much expected, even if it was treated as a surprise.’

The ECB, he reminded, could extend the APP or increase volumes, still had PEPP reinvestments, and was not committed to any rate moves.

‘We stand ready to switch on a ‘Putin emergency purchase programme’ if it’s needed’, he added. ‘So, I really see this as a very wise step into optionality. It’s not accelerating. It’s actually enhancing options.’

‘I wouldn’t say it was a hawkish move’ to remove the words ‘or lower’ from the ECB’s forward guidance on interest rates, he also argued. ‘It’s just a return to reality. I mean, in this environment, to talk about things that are not going to happen… There is no way you could lower interest rates in this environment.’

Concerns about the inflationary impact of a weaker euro did not drive yesterday’s decision, he maintained, reminding that this was no formal target of the ECB.

The latest staff forecasts represent a ‘best effort of conventional thinking’, but ‘the reality may take so many different paths’ that forecasts further out are subject to considerable doubt in every respect except that they will ultimately be revised, he said.

‘I wouldn’t base my thinking on these particular numbers, because I’m sure we’re going to change’, he said. The forecasts cannot possibly reflect the entire impact of the unjustified Russian aggression against Ukraine, he said.

The Council did not discuss when it might start reducing the balance sheet, he said.

The sequencing of policy is ‘really fixed’, he said. ‘I don’t see any way of raising interest rates’ before net asset purchases come to an end.

‘All our forward guidance says differently’, he said. ‘To invert the sequence would put the ECB’s credibility at risk.’