Risk real estate boom
ECB leadership reassesses risk of inflation
2/16/2022 1:26 p.m
For a long time, the European Central Bank assumed that the increase in inflation was only a temporary phenomenon. This assessment could have been wrong, says Schnabel, a member of the board of directors. The exploding real estate prices could be decisive for the future course of the ECB.
Europe’s currency watchdogs are signaling that their assessment of inflation has recently changed significantly and that a gradual change of course in monetary policy could soon be necessary. There is both a risk of acting too early and a risk of acting too late, ECB Executive Board member Isabel Schnabel said in an interview with the Financial Times. “We need to find the right balance between these two risks. However, with the latest data, the risk of acting too late has increased and therefore we need to carefully reassess the inflation outlook.”
The ECB has so far stuck to its course with interest rates at record lows and bond purchases worth billions. However, after the most recent monetary policy meeting in early February, ECB President Christine Lagarde admitted that central bankers were also becoming concerned about unexpectedly high inflation rates. In the euro area, inflation rose to 5.1 percent in January. In Germany, it remained at a comparatively high level of 4.9 percent. The ECB had recently been criticized in particular by German politicians and economists for not reacting more quickly to the rise in inflation.
The ECB is aiming for a stable price level with an annual inflation rate of 2 percent. It accepts it if this mark is temporarily exceeded or undercut. Energy prices in particular have fueled inflation. Schnabel and other ECB Executive Board members have long argued that the effects are likely to be temporary. But now Schnabel said it “now looks increasingly unlikely that inflation will fall below 2 percent by the end of this year, as we had previously expected.”
In Schnabel’s view, when assessing inflation, it is also important to take the rise in home prices into account. The real estate boom increases the risk that the monetary watchdogs will act too late in changing monetary policy, the German economist warned: “We can’t ignore that.”
Costs of bond purchases “possibly” lower than benefits
The ECB has published a study on the impact of the planned inclusion of owner-occupied housing prices in inflation statistics. This shows that the core inflation rate, which is important for monetary policy, would recently rise much more sharply in view of the real estate boom than is the case with the current practice of the statistical authority Eurostat, which only takes rents into account.
Statements by the head of the French central bank, Francois Villeroy de Galhau, also attracted attention: At an event of the London School of Economics, he brought up an end to bond purchases as part of the APP program for the third quarter. An end to the acquisitions is considered a prerequisite for an interest rate hike.
The Governing Council of the ECB has decided to end the bond purchases under the €1.85 trillion pandemic emergency program PEPP from spring. To ensure that the financial markets are not left dry afterwards, the smaller bond program called APP will continue. So far, the monetary watchdogs have deliberately left the end open. In its orientation line for the financial markets – the so-called Forward Guidance – the Governing Council of the ECB assumes that the net purchases will be ended “just before” it starts raising the key ECB interest rates. Villeroy now came up with the idea of deleting the word “short” in order to be able to act more flexibly. However, one does not have to prepare a plan for interest rate hikes before the interest rate meeting in June: “At this stage, any speculation about this roadmap for future increases is premature.”
Schnabel also sees arguments in favor of an end to bond purchases. Your benefits may not justify the additional costs, she told the “FT”. The ECB faces record inflation. Inflation in the euro zone climbed to a new record of 5.1 percent in January, catching not only many experts but also the monetary watchdogs on the wrong foot.