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ECB poised between recovery and rising inflation

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The words in the foreground: growth or prices? Where are the biggest risks? Until the end of this phase – temporary, perhaps – of high inflation, the meetings of the European Central Bank will all play on the balance of risks. As long as the ECB continues to say that the balance of risks is in equilibrium or, rather, that the greatest risks are related to growth, that the recovery must be accompanied, we can be quite certain that a “tightening” of any kind of monetary policy is not forthcoming. Only when inflation is considered the real risk will a change in the direction of the ECB be expected.

A crisis on the supply side

It is the classic reaction of monetary policy in the face of supply problems: even a substantial increase in prices weighs first and foremost on growth, because costs increase and the purchasing power of households decreases, as they have to restructure their purchases ( based on relative prices). But when inflation expectations – expressed by prices, wage demands, the trend of the interest rate structure – start to swell, central banks really need to start worrying. wrong, and to carefully assess the economic, financial and credit situation. It is not an easy job. Also because, after a pandemic and the exogenous freezing of production activity, it is not at all likely that all the pieces of the puzzle will fall in exactly the right place.

The recovery of economic activity



Growth – which today is a recovery of activity, and not a cyclical recovery after a “classic” recession – would still need to be accompanied. It is true, as the “hawks” say, that it might make little sense to stimulate an economy in the face of supply bottlenecks (including labor, given the difficulty of many companies in finding the necessary workers, at least under “pre-pandemic” conditions), but it is also true that the contraction of real wages (and profit margins) is accompanied (or prelude) by a reduction in demand. In June, the GDP of Euroland had not yet returned to the trend prior to the Covid epidemic.

Firm loans at high levels



The trend in loans, in particular, seems to require some attention: they have been stable in recent months – but the latest available data dates back to August – and in fact the annual increase has slowly brought close to zero. In any case, the level remains high and companies are relatively indebted after the pandemic: the phenomenon may not be in contrast with the instruments of monetary policy. The cost of credit, moreover, remains close to the minimum.

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