ECB Doves Try to Quell Hawkish Rebellion - Barron's

The headquarters of the European Central Bank in Frankfurt am Main, western Germany, on Mar. 11, 2021.

AFP via Getty Images

Inflation isn’t currently a threat in the eurozone and it is the duty of governments during a pandemic to borrow to support the economy, without caring too much for now about the rising levels of public debt: As the European Central Bank’s policies come under renewed attack from members of the most hawkish minority wing of its governing council, executive board member Isabel Schnabel has restated the majority view with aplomb in an interview with Germany’s Der Spiegel magazine.

It has been an open secret for weeks now that the ECB’s hawks, led by the German and Dutch central bankers, have raised doubt about the opportunity for the central bank to loosen its monetary policy further in light of the eurozone’s persistent economic problems.

Read:ECB to Accelerate Its Asset-Buying Program

The ECB reacted swiftly last year by embarking on a massive Covid-19 pandemic-specific asset-buying program, which allows it to spend as much as €1.3 trillion to buy securities on the market to keep interest low, and help it reach its inflation target of below but close to 2%, which it has failed to hit since 2014.

The $1.9 trillion Biden stimulus package in the U.S., and subsequent inflation fears that led to a significant rise of interest rates worldwide, however, have failed to impress ECB policy makers and the six-member executive board. Leading doves around President Christine Lagarde, such as chief economist Philip Lane and Schnabel, have explained again and again that even if inflation jumped last month in the eurozone, it is mostly due to one-off factors, such as a hike of energy prices, or the end of value-added tax price cuts in Germany.

“A sustainable rise of inflation [toward the inflation target] would be good news. Unfortunately, that does not quite match the reality,” Schnabel tells Der Spiegel.

These temporary inflation factors won’t repeat in the coming months, furthermore, “aggregate demand will presumably remain weak” throughout 2022, Schnabel says.

Her comments could be seen as a direct reply to the hawkish offensive summarized by a statement from Dutch central bank head Klaas Knot who told Reuters this week that the eurozone economy rebound could help the ECB unwind its pandemic program as soon as in the third quarter of this year.

The ECB decided last month to accelerate the pace of its weekly purchases—although it has failed to do so so far—but kept the overall level of the program unchanged at €1.85 trillion, despite expectations it might increase it due to the European economy’s continuing problems.

That may have been a sign of heightened divisions within the bank’s governing council, as reflected in the just published minutes of the March meeting, indicating that the board had opposed an increase of the program and even stating that the current balance of risks is “possibly shifting to the upside …”

“Bottom line: There is a disagreement within the governing council over the risks posed by higher bond yields,” said Frederik Ducrozet, global macro strategist at Swiss-based Pictet Wealth Management.

And the tension within the ECB’s ruling body may only “be resolved if and when the market tests the ECB’s commitment in the future,” he adds.

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