“Not compatible with rate hikes”
Bundesbank concerned about ECB bond purchases
11/10/2022 9:33 p.m
In order to get the high inflation under control, the European Central Bank recently raised interest rates sharply. Bundesbank President Nagel accuses the monetary authorities in Brussels of steering in the opposite direction with their continued bond purchases.
Bundesbank President Joachim Nagel is calling for a reduction in the European Central Bank’s bond holdings, which are worth billions. The change of course in monetary policy also includes tackling a reduction in stocks, Nagel said in a speech at the Karlsruhe Economic Club in the afternoon. These bond holdings totaled almost five trillion euros. “I don’t think it goes together to move short-end rates in one direction and longer-end rates in the other direction,” he noted.
If you have two monetary policy tools at hand for monetary policy normalization, it does not make sense to use only one of them. “In the course of rising key interest rates, the question increasingly arises as to why the development of bond yields in the euro area is tending to be slowed down by the reinvestment policy,” said Nagel. So far, expiring bonds from the PEPP emergency bond purchase program and from the older APP purchase program have been completely replaced. This tends to depress bond yields.
After the interest rate meeting in October, ECB President Christine Lagarde announced that a decision would be made in December on important principles for reducing bond holdings. According to ECB deputy head Luis de Guindos, the central bank will start reducing its bond holdings next year.
Inflation in the euro area over 10 percent
“In view of the fact that inflation is constantly reaching new highs, monetary policy must provide clear orientation so that inflation expectations remain anchored and price-wage spirals are prevented,” said Nagel. He expressed his confidence that the currency watchdogs would push back the high inflation. “You can rely on monetary policy fulfilling its mandate as on a lighthouse that enables safe passage,” he said.
In October, inflation in the euro area was 10.7 percent – the highest value since monetary union. That’s more than five times the ECB’s inflation target of 2 percent. To counteract this, the ECB has raised its key interest rates several times in rapid succession – most recently twice by 0.75 percentage points. The key interest rate at which banks in the euro area borrow money from the ECB is now 2.0 percent. The interest on deposits, which is decisive on the stock exchanges and which institutes receive from the central bank for parking excess funds, is 1.5 percent.