Jari Stehn, Goldman Sachs' European head economist, discussed the rise in inflation, the reactions of the Fed and the ECB, and the implications for financial markets.
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| [Jerome Powell] |
The central bankers' conference in Jackson Hole, Wyoming, is being closely monitored by financial markets. Jerome Powell, the chairman of the US Federal Reserve, wishes to comment on the current state of affairs in the United States. This might give fresh insights into how the monetary policies of America's and Europe's central banks are likely to diverge in the future, with significant implications for financial markets. In an interview with a German media FAZ, Jari Stehn, European head economist at investment bank Goldman Sachs, said, "It is now clear: America will get out of the ultra-loose monetary policy faster than Europe," On the other hand, the European Central Bank's main interest rates are unlikely to rise until at least 2025.
According to Stehn, the Fed will likewise end its bond purchases sooner than the ECB. "We expect the Fed to decide in November to start tapering, that is, to exit from bond purchases." The central bank will acquire fewer securities in December than in previous months. Bond purchases in the United States are expected to end at the end of the third quarter of next year; in Europe, the ECB will keep its corona crisis program PEPP running until at least March of next year, and will continue to buy securities through the longer-term purchase program APP until mid-2023.
The initial moves in America, according to the Goldman analyst, would not put the ECB under strain just yet. "For the ECB, it is irrelevant if America marches ahead of time when it comes to exiting its loose monetary policy," Stehn adds. "Europe got into the corona crisis with less utilization - and the United States is already further in the economic cycle."
At the very least, Goldman expects ECB President Christine Lagarde to slow down her asset purchases in the near future. "We expect that the ECB will slow down the pace of its bond purchases under the PEPP crisis program in the fourth quarter of this year."
"That will be a signal that monetary policy is slowly leaving crisis mode," Stehn added. "But what the central bank does after the PEPP crisis program expires next spring will be more decisive." APP will acquire billions of euros every month when the longer-term buying program is completed. "In my opinion, there will be a transitional arrangement," Stehn said. "Either the ECB is temporarily increasing the APP's monthly bond purchases, or it is introducing a new program for the transitional period - or it is slightly extending the crisis program."
The financial markets will be impacted significantly by the transatlantic monetary policy divergence. "Bond yields will rise globally as the year progresses," says Stehn, "but they will remain significantly lower in Europe than in the US." "However, we continue to expect constructive economic growth for the second half of the year; there will be a slight slowdown at a high level." he says, despite the fact that he feels Europe's growth has already peaked.
Inflation in Germany, on the other hand, has not yet hit a tipping point. "Inflation in Germany will continue to rise in the short term - but not permanently," Stehn said. He forecasts 4.4 percent inflation in Germany in November, according to the Harmonized Consumer Price Index. Because of numerous unique impacts connected to the corona pandemic-expired, inflation will decline again the next year. "There's a good chance inflation will fall again next year," Stehn says, "but there's more uncertainty about how far it can fall then." By the end of 2024, he expects the euro zone to have 1.5 percent inflation. “From the ECB's perspective, with its 2% target, inflation will tend to be too low, not too high,” Stehn adds.
Even if producer prices in Germany climbed as dramatically in July as they did during the 1975 oil crisis, Stehn says he would not compare the current situation to that of 1975. “It is the corona pandemic's special effects that are now causing such high inflation rates. That's not the same as the wage-price spiral of the 1970s. In Europe, salaries grew at a relatively slow pace. "With the reopening of the economy, demand rises sharply, supply still needs a little - that is currently driving prices up." Many experts were taken aback by the fact that inflation has now risen substantially for the first time in a long time. "But of course the whole pandemic came as a surprise." acknowledges the economist.
©Source : FAZ