ECB POLICY COMMITTEE FRACTURES

Members of the European Central Bank’s (ECB’s) policy-making committee are at odds over the pace and degree of ending bond purchases and raising interest rates, according to the Financial Times.
Some members want a “firm end date” to bond-buying so the bank can raise interest rates in this year’s third quarter to avoid “falling behind the curve” on inflation, minutes of the group’s March meeting revealed.
The ECB’s interest rate has been -0.50 since 2014, while inflation rose to a record 7.5 percent in March.
Others in the group wanted to stand pat until the impact of the Ukraine war was more clear. They feared the war might send Europe into a “technical recession,” which is defined as two consecutive quarters of economic contraction.
Ultimately, the group agreed to end its net bond purchases in this year’s third quarter but wait to raise interest rates for now.
However, the minutes showed that a growing number of members are taking a more aggressive stance toward inflation and policies that could contain it.
“The hawks have the upper hand,” strategist Frederik Ducrozet at Pictet Management told the FT.
Investors are pricing in an interest-rate hike of 0.6 percentage points before 2023, which would move the rate into positive territory for the first time in eight years.
TRENDPOST: As recently as late January, ECB president Christine Lagarde was downplaying the need to raise interest rates to rein back inflation, as we reported in “Lagarde Dismisses Calls for Higher Interest Rates” (25 Jan 2022).
Boosting rates would risk “putting the brakes on growth,” she warned, and that “the cycle of economic recovery in the U.S. is ahead of that in Europe,” so the ECB “has every reason not to act as quickly or as ruthlessly” as the U.S. Federal Reserve. 
Now it has a reason: in March, inflation raged across Europe at a record 7.5 percent annual rate, which threatens not only to “put the brakes on growth” but to throw the continent into a full-blown recession. 
TREND FORECAST: “Hawks” on the ECB’s rate-setting committee may have the upper hand, but the group still will be unable to impact inflation in a meaningful way any time soon.
The spread between interest and inflation rates is so wide that the bank would have to raise rates tenfold to dent inflation. However, the ECB knows that to raise rates that much without crashing Europe’s economy would take years.
The bank will raise rates this year, with a growing likelihood that the first rate hike will come at next month’s meeting.  
This would begin the bank’s slow return to a reasonable policy framework but will have the same effect as whispering into a hurricane.