The European Central Bank’s decision to cut interest rates this week may have been welcome news for those who worry about inflation and economic protectionism. But it probably wasn’t a surprise that the ECB didn’t move just one step in unison with other European central banks, which are all taking different paths on monetary policy.
The European Central Bank has decided to start tapering its bond purchases, but it is not the only central bank taking divergent tracks. The ECB’s decision comes after a period of low inflation and economic growth in Europe.
A day after the Federal Reserve set the stage for rate hikes in 2022, Europe’s top central banks took opposing policy paths, highlighting the challenges facing policymakers as they try to balance rising inflation with new risks to growth posed by the fast-spreading Omicron variant of the coronavirus.
The Bank of England raised its benchmark interest rate for the first time since the crisis started, while the European Central Bank announced it will phase down an emergency bond-buying program while increasing other stimulus measures to keep the eurozone’s 19-nation recovery on pace.
Officials from the Federal Reserve laid out plans on Wednesday to expedite the removal of stimulus and said they aim to hike interest rates three times next year, signaling a dramatic policy shift that reflects growing anxiety about the possibility of continued high inflation.
The adjustments demonstrate how central banks’ plans to phase off multibillion-dollar stimulus initiatives and move toward higher interest rates are unfolding at varying rates in the world’s major economies, which are grappling with partial recovery while inflationary pressures build.
At a press conference on Thursday, ECB President Christine Lagarde said, “I don’t believe anything occurring at the Fed is guaranteed to happen” in Europe. She said that the economies of the United States, the United Kingdom, and the eurozone are at various stages of the economic cycle and received varying degrees of government assistance during the epidemic.
The Omicron form, initially discovered in South Africa and now found in more than 70 nations, is clouding the prognosis for a worldwide recovery that is already unequal.
Officials on the Monetary Policy Committee of the Bank of England voted eight to one on Thursday to raise the policy rate to 0.25 percent from a record low of 0.1 percent, citing the strength of the labor market as evidence that higher borrowing costs were necessary to keep price rise in check.
Despite rising incidences of the Omicron variety in the United Kingdom, which has prompted additional restrictions in the run-up to Christmas in a bid to halt a wave of illnesses that public-health authorities warn might overload hospitals, the BOE took action. On Wednesday, the United Kingdom reported a total of 78,610 Covid-19 instances, the highest number ever recorded in a single day.
Omicron is a concern, but its economic implications are unknown, according to the majority of the panel, and its appearance does not warrant further delay.
On Tuesday, a Covid-19 immunization facility in Ramsgate, southwestern England.
Gareth Fuller/Associated Press photo
The BOE’s decision came as a surprise. Despite the fact that a rate hike was predicted, many investors and analysts expected the central bank to remain stable until early next year as the economic impacts of Omicron became obvious.
The pound gained 0.5 percent versus the greenback. Government bonds in the United Kingdom were sold off, with the benchmark 10-year gilt yield increasing to 0.825 percent from 0.727 percent on Wednesday before retreating to 0.783 percent.
The S&P 500 rose 0.5 percent on Thursday, a day after the broad stock index finished at its second-highest level on record, as a result of the central bank moves.
The BOE and Fed’s actions show how hopes that high inflation would be temporary are giving way to concerns that a period of strong price rise and low unemployment might fuel wage and price increases, prolonging inflationary pressure.
The European Central Bank (ECB) is adopting a more cautious stance. Even as the US economy speeds over its pre-crisis high, the eurozone economy remains below its pre-pandemic level and seems to be declining dramatically.
“It seems that central banks are starting to normalize monetary policy at various times,” said Mark Zandi, chief economist of Moody’s Analytics. He claims that disparities in labor markets, in particular, drive policy decisions in each location.
“The British labor market is leading the way,” he added, noting continuous drops in unemployment after the government’s wage-support program ended in September. “The United States is a little more jumbled, and Europe is stumbling.”
The ECB said that it will conclude its €1.85 trillion ($2.1 trillion) emergency bond-buying program in March as scheduled, but would extend a second bond-buying program next year. The ECB’s monthly bond purchases will drop to €40 billion in April from over €80 billion now, and will continue at least until October. The bank said that it will not raise its main interest rate, which is presently fixed at minus 0.5 percent, until its net bond purchases are completed.
Ms. Lagarde said, “It is quite improbable that we would increase interest rates in the year 2022.”
Starting in July, the ECB will progressively reduce its bond purchases to €30 billion, and then to €20 billion in October. The ECB said it might continue its emergency bond-buying program if necessary “to mitigate negative shocks connected to the outbreak,” as an additional precaution.
“We are stepping into the area of uncertainty” with the Omicron model, according to Ms. Lagarde. In that framework, she added, progressively reducing bond purchases made logical.
Analysts were shocked by the ECB’s decision to maintain its bond-buying program open-ended, since it contrasted sharply with the Fed’s choice to cease asset purchases completely.
Turkey, where the rate is presently above 20%, presents a warning to the Federal Reserve and other central banks across the globe as they struggle with growing inflation during the economic recovery from the epidemic. After years of widespread expansion, soaring inflation has thrown the economy into disarray. Sedat Suna/Shutterstock photo
The euro surged 0.4 percent to $1.1335, as 10-year German government bond rates fell to minus 0.326 percent on Thursday from minus 0.359 percent the day before.
Supply-chain constraints are hurting Europe’s massive industrial industry, and governments across the continent have lately reimposed social restrictions in an effort to stem a new wave of Covid-19 cases. Since the summer, the rates on Southern European government bonds have risen, placing pressure on heavily indebted countries like Italy’s.
Nonetheless, eurozone inflation has surged dramatically, hitting 4.9 percent in November, the highest level since the euro was introduced in 1999 and far over the ECB’s 2 percent objective. Inflation in Germany has hit 5.2 percent, which is uncomfortably high for a country with a long history of fearing high inflation.
According to statistics from the Bank for International Settlements, more than a dozen central banks have lifted interest rates this year as the global economy reopened after extensive restrictions to manage Covid-19.
Despite the country’s own spike in Omicron cases, Norway’s central bank hiked its benchmark interest rate on Thursday. The Norges Bank raised its main interest rate from 0.25 percent to 0.5 percent, with another hike expected in March.
—This story was co-written by Anna Hirtenstein and Paul Hannon in London.
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The “european central bank monetary policy” is a term that refers to the decisions and actions taken by central banks in Europe. The European Central Bank has been taking divergent tracks as they confront inflation.
Frequently Asked Questions
How does the central bank respond to inflation?
A: The central bank of a country will typically raise interest rates in order to combat inflation. This is because when the price for goods and services increase, more people are going to want cash instead of products or other goods that could be sold for money.
What is the European central banks main task?
A: The European Central Bank is a central institution of the European Union established in 1998 to oversee monetary policy. It has been described as one of the most powerful institutions in Europe due to its vague yet extensive powers over several areas of economic and financial life.
Do central banks want inflation?
A: No, central banks are trying to create a stable, low inflation economy. Inflation is when the general price of goods and services in an area increases faster than the rate of increase of wages or salaries over time.
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