The Federal Reserve building is seen in Washington, US. Picture: REUTERS/JOSHUA ROBERTS
The Omicron wave around the end of 2021 again muddied the economic picture and could prolong supply chain and labour market distortions that keep inflation rates higher for longer, as well as raising the risk of them becoming embedded in household, worker and company expectations. ECB chief economist Philip Lane said this week he still sees inflation back below the 2% target in 2023 and 2024, while its president, Christine Lagarde, spoke on Tuesday of an “unwavering” commitment to stable prices and new Bundesbank boss Joachim Nagel said he sees a “danger” inflation stays high.
ECB policy rates and long-term benchmark sovereign bond yields were negative pre-pandemic and remain so. And the size of its accumulated balance sheet is both higher than the Fed’s in nominal terms as well as being, at more than 65%, almost twice the share of GDP than Washington’s. Of course, the Fed cut its policy interest rate by more than 150 basis points and revamped its net bond buying from scratch when Covid-19 hit. The ECB by contrast relied mostly on the PEPP bond purchase programme as its key support flooring long-term interest rates. Its repo rate was already at 0% since 2016 and its deposit rate had already been cut to the current -0.5% in 2019.
Deutsche Bank’s “House View” published on Tuesday says this “lift-off” is unlikely until 2023, but it sees net asset purchases dropping by about 70% in 2022.
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