He promised it, so it was. When Christine Lagarde, head of the European Central Bank (ECB), had guaranteed that there would be “interesting changes and news” at the July meeting, she was not lying. The first meeting after the Strategy review, which established a symmetrical inflation target, marked a change of pace for Frankfurt. The doors are left open to an increase in the pandemic purchasing program, the Pandemic emergency purchase program (Pepp). Above all, there is room for fluctuations in inflation.
An ECB more aggressive than ever. And not just in words, which would already have been enough for observers to be satisfied. After all, the world has changed: the inflation target “close to but below 2%” was set in 2003, and did not contemplate the arrival of the SARS-Cov-2 coronavirus. And inflation does not seem to be a problem at the moment, as it is well below the target rate of 2 percent. The most marked novelty concerns the Pepp, the maxi plan for the purchase of public and private securities launched in March 2020 and increased in June a year ago, for a total of 1,850 billion euros of firepower. The Governing Council of the ECB has decided that for the rest of the year it will be conducted at a “significantly higher” pace than in the first months of the year. This means that flexibility is still high and can be best used in perhaps the toughest phase, especially mentally, of the pandemic. The coming autumn will test both citizens and institutions. And the fundamental objective is not to derail the euro area relaunch projects, such as the Next Generation EU program. In this situation, Lagarde reiterated that the ECB will do everything possible until the health emergency is over.
But there is more. As explained in the explanatory note of the latest monetary policy decisions, the ECB has decided to maintain a dove-like attitude. “In its recent review of the strategy, the Governing Council agreed on a symmetrical inflation target of 2% over the medium term,” the statement said. Who underlines that “the main ECB interest rates have long been close to their lower limit and the medium-term inflation prospects are still well below the Governing Council’s target”. In this context, «the Governing Council today revised its forward guidance on interest rates. It did so to underline its commitment to maintain a constantly accommodative monetary policy stance to achieve its inflation target ». And it is that “constantly” that is the other turnaround that denotes how much the pandemic world has changed. It would have been unthinkable to have such an open approach until a few years ago. There was none during the 2007/2008 Global Financial Crisis, nor during the Eurozone sovereign debt crisis.
An attitude that realigns Frankfurt with Jerome Powell’s Federal Reserve, which a little less than a year ago, during the August Jackson Hole symposium, had decided to tolerate temporary changes in the rate of inflation. After a few months of misalignment between the two sides of the Atlantic Ocean, the gradual approach has now been completed. It remains certain, both for the Fed and for the ECB, that the uncertainties are numerous, but also that the recovery is there, exists and the evidence is that it is solid and more homogeneous than in the recent past. Adaptive pragmatism, which was the basis of Janet Yellen’s Fed, has now also been introduced from Frankfurt. Not exactly “whatever it takes” like Mario Draghi’s in July 2012, but almost. Not surprisingly, financial operators have – on average – welcomed the “new” ECB.
On the epidemiological front, there was no lack of references to the resurgence of infections due to the spread of the Delta variant, which will become prevalent in the eurozone. Even if there were no explicit references, it is possible that there could be a backlash on Gross Domestic Product (GDP) between the fourth quarter of 2021 and the first of next year. Much will depend on how the situation is managed by the individual countries, which will have to push the accelerator on the side of vaccination campaigns and deal with the outbreaks that are emerging. New lockdowns are possible but, as explained by the US bank Goldman Sachs in a note reserved for institutional clients, the pandemic could soon become an epidemic. Translation: As vaccinations increase it is possible that, instead of a global problem, there may be local clusters, which are easier to eradicate.
This is also what Frankfurt hopes, which in fact has not changed the positive outlook on the future, without forgetting the unknowns on the road to the new normal. What was supposed to be an interlocutory meeting has turned into the first step for a post-Covid ECB. Now the eyes are on September, first, and December, then. September will measure how bad the Delta variant is, and December will be an opportunity to fix the Pepp. So far it will be conducted until March 2022, or in any case until the emergency is over. The discussion has already begun. The decision will be made after the summer.