Even before the European Central Bank has ended the current buying programme, ECB members are already working on a possible next programme. If you are still wondering whether the ECB’s policy might look different now that inflation is at record levels, you now have your answer.
ECB President Lagarde has already stated on several occasions that she will not allow a divergence in financing conditions between member states. With Italian 10-year yields at 3.4 percent and the spread against Germany above 2.0 percent, ECB members apparently already find it necessary to talk about a new instrument should interest rates rise too fast.
There is something ironic about this. Just when the ECB has been persuaded to raise interest rates, they come up with this.
Impossible
It shows once again that the ECB’s task is actually impossible. Given the large differences in competitiveness, potential GDP growth and debt burden, a ‘one size fits all’ policy is simply not possible.
And with the European debt crisis still fresh in the memory, this means that the ECB has to step in, even if even one member state gets into trouble. And in order to stay ahead of the markets, the ECB is now starting to talk about support packages should that happen.
Inflation and recession
Add to that the fact that the ECB’s task was far from easy anyway. Interest rates now have to be raised anyway to get inflation under control - which is also impossible since inflation is mainly determined by energy and food prices - while a new recession is already on the horizon.
Policy error
The risk of a classic policy error - raising interest rates when a recession is looming - is high. And it is precisely in a recession that investors become more critical of this divergence. I therefore expect the same recipe from the ECB when the recession arrives. Lower interest rates if still possible and buying up government bonds to keep long-term interest rates low. That would put doubts about the debt sustainability of some Member States back on ice.
If it comes to that, it will be good news for risky investments, which will have priced in the recession by then. But for the euro it is disastrous.
Jeroen Blokland is founder of True Insights, a platform that offers independent research to build diversified multi-asset portfolios. Blokland was most recently head of multi-assets at Robeco. His “chart of the week” appears every Monday on Investment Officer.
This column originally appeared on InvestmentOfficer.nl.