The European Central Bank (ECB) is the Eurozone’s central bank. It’s at a very important juncture, preparing to reassess its long-term monetary policy framework. Located in Frankfurt, Germany, the ECB’s core mandate is to maintain price stability, which it aims to achieve by keeping inflation around 2%. This commitment puts the institution at odds with a perhaps unintended but self-obligated, complicated landscape as it negotiates economic crises through each of their member states.
The ECB influences the economy through interest rates. It additionally oversees the Eurozone’s monetary policy. The ECB Governing Council meets eight times a year. It’s composed of governors of national banks from the countries that use the Euro, plus six other permanent members. Notably, Christine Lagarde, the President of the ECB, is part of this influential body that makes critical financial decisions affecting millions of citizens.
The Role of Quantitative Easing
To mitigate economic slumps over the years, the ECB has leaned on a monetary policy device called Quantitative Easing (or QE). This strategy includes the ECB simply printing Euros to buy assets, mostly government or corporate bonds. Such actions are typically reserved for extreme economic situations when lowering interest rates alone is insufficient to achieve the desired price stability.
That stretched as far back as the Great Financial Crisis between 2009-2011, through the pains of low inflation in 2015. Most recently, QE was one tool used in the response to the economic fallout from the COVID-19 pandemic. Unconventional monetary policy has played a critical role in injecting liquidity into the economy, fostering recovery and stabilization and will continue to work to stabilize prices.
Transitioning to Quantitative Tightening
As economic conditions change, the ECB will soon be shifting from QE to QT. QT means stopping the buying of newly-issued bonds, as well as stopping the reinvestment of maturing bonds. This approach seeks to gradually normalize monetary policy and reduce the balance sheet that had expanded significantly during periods of QE.
Joachim Nagel, the influential ECB policymaker, who is the President of Germany’s Bundesbank. He warned that constant vigilance will be necessary as the economic landscape continues to change dramatically. He stated,
“the ECB will have to reassess the situation.”
Such a serious reassessment would signal a significant shift in strategy. Inflationary pressures and growth trajectories are in a state of turmoil across the Eurozone.
Economic Challenges Ahead
The persevering geoeconomic landscape poses new strategic and technical challenges to the ECB. With the rise of inflation in several member states, achieving this stability has proved to be a challenge. The broader dynamic of countervailing forces that rising prices and possible recessionary headwinds have created makes decision-making within the Governing Council more difficult.
Global supply chain disruptions and current geopolitical tensions are adding to inflation dynamics. This puts the ECB under huge pressure to act in the right way. The delicate balance is to make sure that any actions taken don’t suffocate growth, while taking necessary steps to cool down an overheating economy and inflation.