Last week, the central Banks of the United States, the United Kingdom and the euro zone had each one a meeting in a context affected by the uncertainties about the evolution of the covid-19 pandemic, about the durability of the economic rebound in the concerned countries and about the character of the inflation which affects them in order to define and to make public the guidelines of their monetary policy for the year to come. Through the definition of a guideline, these institutions which have become essential actors of the economic policy intend to avoid the disorders which could occur on the financial markets due to a wrong interpretation of their decisions as it happened several times in the past, which could more perturb an uncertain so worrying economic climate.
The Federal Reserve in the U.S. proceeds for 18 months to buy Treasury Bonds and States and local authorities ones to a monthly amount of more than 100 billion dollars. That has allowed to keep the 10 years Treasury bond rate around 1.5%. It has announced that from next January, it will reduce its acquisitions by 30 billion per months and that these ones will end at the end of March. Three basic rates increases are expected that year and it would be near 1% at the end of the year. The prices increase in November reached 0.8% month on month and 6.8% year on year, which is the highest level for forty years. The energy prices increase is not the sole cause because if we take them out of the calculus along with volatile foods prices, the core inflation is brought down to 4.9%.
The Bank of England, itself, has increased its basic rate to 0.25%. Inflation in the country reached 5.1% on a year on year basis and, as in the U.S., it is not anymore considered as a transitory phenomenon. The supply chains are disrupted by the Brexit and the pressures on prices would remain after the coming back to normal to logistic systems. High tensions also exist on the job market and will have consequences on enterprises costs. But the Bank of England action remained until now accommodative and mid and long-term interest rates are still by large inferior to 1%.
The European Central Bank has had, since the beginning of the sanitary crisis, a very aggressive policy in order to allowing to the State-members of the euro zone to soften its economic consequences. To the State-bonds buying program which was in place before the sanitary crisis (APP) has been added a special program (PEPP) which has lead to new purchases on the market for an amount of 1 850 billion euro. This program will be progressively stopped during next year 1st quarter but the practice consisting in reinvesting the amounts coming from received interest rates or from the reimbursement of the bonds come at maturity will continue at least until 2024. They represent about 15 billion each month. The traditional program, itself, will be reduced. It is expected it will represent 40 billion during the 2nd quarter, 30 billion during the 3rd quarter and 20 billion during the 4th quarter.
On the other hand, the ECB has not given any indication about an eventual interest rate increase. Yet, the inflation in the euro zone will have reached in 2021 4.9%. So it is well above to the 2% level adopted as an objective by the institution. This figure keeps hidden real differences among members because in France, on one year, inflation has only reached 2.8%, so by far less than in Germany where it has been 5.2%. But this figure includes an important basis effect because the country had, at the beginning of 2020, reduced its VAT rate by 3% et the normal rate has been reintroduced on 2021 January 1st. That effect will disappear in 2022 which explains that the ECB inflation forecasts for the coming years, which seem a lot too optimistic compared to what is occurring around the world, are 3.2% in 2022 and 1.8% in 2023.
The keeping of accommodative monetary policies, not to say expansionist, in such an inflationist environment expresses a double mutation. Regarding economy, monetary policy has always been used to fight against inflation. Activity is weighted, so are the tensions which are affecting prices through the monetary restrictions thanks to rates rise. The most famous example is given by the policy followed by Paul Volcker who pushed interest rates above 15% at the end of the Seventies to curb the inflationist wave generated with the second oil shock. But even if nuances can be put forward according to periods and countries, the monetary policy has mainly been used to reduce the inflationist risk. To the opposite, the budgetary policy is considered as the privileged tool to make the economy rebounding. This paradigm is today put into question as by economists who are not surprised by this change as by governments because since the beginning of the crisis, the monetary policy has become the main tool to support activity. The Joe Biden Rebound Plan, after more than a year of tough discussions at the Congress, has not had yet real consequences on the American growth.
The second mutation is about the central banks themselves. Even if in their statutes the keeping of low inflation rate, below but near 2% as at the ECB for instance, is their main duty, it is considered that they can contribute to support growth and employment. But it is only a second priority and couldn’t offset their main role, the control of inflation. But in the three countries or economic zones, and the situation is the same in Japan and in China, the central Banks, with the subtle approval of the governments, because they are supposed to be independent, have abandoned that major point of their mandates. Not only they have contributed, through money creation, to support the economy at the crisis highest moment, but they still are doing it when these States are facing an unprecedented inflation wave for several decades.
The issue which is risen today is to know if that mutation in the attitude of the central banks will last because we know that when an experience is put into place, it is difficult to come back. The three Central Banks announcements include a progressive reduction of their action in favor of the supporting of the economies, but in any case their abandon and the putting into place of a restrictive monetary policy which, in accordance with their mandates, would have as a mission to make inflation coming back to a level inferior to 2%. The very low rates increases, announced in the U.S. and in the United Kingdom for instance are strengthening a situation where, durably, these countries will live with negative real interest rates.
So there will have winners and losers. The States will see their real debt strongly reduced as that one of the enterprises which are heavily indebted due to their investments or their acquisitions. On the side of the losers, there is the huge numbers of household to whose are proposed, as in France, regarding their saving accounts, a remuneration inferior to 1% when inflation was near 3%. So the time when it was possible to rely on the central banks independency to protect savers is quite over.