“We do not conduct monetary policy on the basis of possible election outcomes,” Mario Draghi told a press conference last month. The president of the euro zone’s central bank can’t be seen to talk about politics in public, but he knows all too well how political uncertainty can impact prices and monetary policy.
Fears of a victory for Marine Le Pen and the National Front gave rise to considerable nervousness in the markets ahead of Sunday’s elections. This anxiety subsided considerably with the triumph of reformist Emmanuel Macron. But the sigh of relief only highlights the increasing number of voices, above all in Germany, demanding a fast end to the bank’s ultra-loose monetary policy, which in recent years has seen negative interest rates and an ongoing program of quantitative easing. Although the policy has saved the German government tens of billions in debt servicing, the policy is deeply unpopular among savers and the financial and insurance industries, where it is seen as threatening the long-term viability of business models.
“It is high time the ECB put an end to its low-interest rate policy,” said Lutz Goebel, the president of Germany’s Federation of Family Businesses, on Monday. Hans Michelbach, the senior conservative on the finance committee of the German parliament’s lower house, also demanded change, which he called “long overdue.”
It is high time the ECB put an end to its low-interest rate policy. Lutz Goebel, president, Federation of Family Businesses
And there have been hints from within the ECB that a shift in policy may be on the horizon. In a speech in Tokyo on Monday, ECB board member Yves Mersch said the time was right for a debate on the issues. Or, in ECB-speak: “if current trends continue, a discussion on policy normalization becomes warranted in the future.” Since the beginning of 2017, growth has accelerated and political uncertainties have diminished, he added, but said any discussion needs to be conducted in a “structured, orderly and appropriately cautious manner.” Many within the ECB fear that vigorous debate could see interest rates surge on the markets. Rates have already risen in recent months, and too quick a jump could force the central bank to change course again.
Early moves in monetary policy change are regarded as particularly tricky. Even small changes can set off strong market reactions, if expectations are substantially shifted. In May 2013, the then-head of the US Federal Reserve, Ben Bernanke, announced a somewhat earlier end to the Fed’s bond-buying program, setting off a minor seismic shift on world markets. Abrupt changes like that are precisely what the ECB wants to avoid.
Mr. Macron’s victory is not the only reason for Mr. Mersch’s more optimistic tone. The euro zone's economic outlook has brightened substantially in recent months, with the upturn impacting the entire currency bloc, notably in falling unemployment. In addition, April saw an unexpected jump in Eurozone inflation to 1.9 percent annually.
Moderately rising inflation is precisely the ECB’s goal. It is viewed as an indicator of an economy emerging from decade-long doldrums. In this, the core inflation rate – which strips out volatile energy and food prices – is more significant than the headline figure. That rate also jumped in April, from 0.7 to 1.2 percent. The ECB’s medium-term goal is “less than, but close to 2 percent” inflation. To achieve this, it continues to buy €60 billion in bonds every month, chiefly euro-zone sovereign bonds. That program is set to continue until the end of this year.
Jan Mallien covers monetary policy for Handelsblatt out of Frankfurt. To contact the author: [email protected]