Attempt to move away from the flood of money despite record inflation

Wasn’t there a little more? Simple savings don’t pay off at the moment. Symbolic image: Gerd Altmann on Pixabay (public domain)

The ECB wants to stop buying bonds, but not really. The rate hike is expected to come at the next meeting as the World Bank warns of global stagflation

“The Governing Council stands ready to adjust all its instruments, while being flexible where necessary, to ensure that inflation stabilizes at its 2% target over the medium term,” the European Central Bank (ECB) said after the last meeting of the Governing Council on Thursday.

However, the measures taken in the face of record rising inflation show that Frankfurt am Main either does not recognize the problem in real terms, does not take it seriously, or knowingly wants to ensure that the national debt that got out of hand during the crown pandemic is partially eliminated through inflation.

Because, as the European statistics agency (Eurostat) recently established, official inflation in the euro area rose to 8.1 percent in May. In Germany, it is already above average with 8.7%.

For the average Joe, real inflation is much higher, however, because more and more factors have been taken to beautify the inflation rate in the euro area. It’s even worse in Germany, which is why the Federal Statistical Office (Destatis) officially estimates inflation at 7.9 percent below average.

Cosmetic reaction to the maximum

The ECB’s response to record inflation is cosmetic at best because it is obligated to do so. Not even an interest rate reversal of the kind that has long since started in many countries, including Britain and the United States, has not yet started. The ECB announced its “intention” to raise interest rates only at the next Council meeting on 21 July. In the first rate hike in more than a decade, the base rate will also have to be raised by 25 basis points from zero to 0.25 percent.

It can simply be called ridiculous that this is intended to combat massively high inflation. This also applies to the intention that another rate hike may follow in September, depending on the economic situation and inflation. It could therefore be as much as 50 basis points, he explains. So the prime rate would rise to 0.75 percent at best in September, if that were actually implemented.

Initially, there will be no changes in negative interest rates for commercial bank deposits with the central bank. The deposit rate (penalty interest) remains at minus 0.5 percent. So the banks have to continue paying to park the surplus funds with the ECB.

In this way, the banks in turn justify the so-called custodian fee that they often impose on customers. They have to pay to deposit their money in the bank. For some time now, customers have been “shaved” several times: they do not receive interest on savings and have to pay the “custody” with the banks, while the value of savings depreciates more and more rapidly due to the strong and rising inflation.

The only concrete measure that can be mentioned is that the ECB no longer wants to buy government and corporate bonds under the general purchase program (APP), even if only after 1 July. At the end of March, the central bank stopped buying mainly government bonds through the Pandemic Emergency Purchase Program (PEPP).

Since 2015, the ECB has bought bonds worth around five trillion euros, pumping a lot of money into the financial markets, driving up inflation. At times, the euro countries’ entire new net debt has been financed through the controversial purchase of government bonds: the ECB is not actually allowed to engage in government funding.

The small print is also important here, because the headlines need to be read. “As regards the Pandemic Emergency Purchase Program (PEPP), the Governing Council intends to continue to reinvest the principal capital of the securities purchased under the program at least until the end of 2024”.

Put simply, this means that bond purchases will not really stop either, but the ECB wants money from maturing bonds to be reinvested until at least 2024 – that is, additional bonds will be bought – in order to maintain interest rates for investors. highly indebted countries as low as possible.

Of course, ECB President Christine Lagarde has her French homeland in mind. In any case, their entire schedule is coordinated with the presidential and parliamentary elections. Emmanuel Macron has now been confirmed as president – and the first round of the general election will take place on Sunday. No interest rate hikes will be made before the second round, and this is election publicity for Macron, who will only have to hand out the bitter pills after the election, even when it comes to energy subsidies.

Not just “late and hesitant”

The reason why this policy to fight inflation is ridiculous, but most observers only talk about “too late and too hesitant”, can be seen in the United States, among other places. In May there was an official inflation rate of 8.6 per cent compared to the previous year.

This means that inflation is at its highest level for over 40 years. Inflation is on the rise, albeit more slowly there than in the euro area, where it was 8.3 per cent in April.

But in the meantime she had also fallen a little bit again. The US inflation rate was already 8.5% in April. Because the Fed, unlike the ECB, has now raised interest rates in two stages, the last in May of an interest rate hike of 0.5 percentage points. It is now between 0.75 and 1%.

The Fed is expected to take a bigger sip from the bottle next week and raise interest rates by 50 basis points again. Additionally, the central bank has already begun to reduce its total assets, which have ballooned to a whopping nine trillion dollars, and Fed chief Jerome Powell announced further interest rate hikes this year.

Using the example of Britain, it has already been shown here where the journey on the path of inflation is going. The Bank of England (BoE) ended the zero interest rate policy even before the Federal Reserve Bank (Fed). Within six months, the benchmark interest rate has now been raised to one percent, the highest level since the 2009 financial crisis. The BoE is likely to raise interest rates for the fifth time this week.

The interest rate is expected to rise by 50 basis points to 1.5 percent, as a double-digit inflation rate is even expected to peak in the fall. Lower income brackets have long been struggling with real inflation above ten per cent because they have to spend a particularly large share of their purchasing power on energy and food, areas where particularly high price increases can be observed. .

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