How will the tightening of the ECB’s monetary policy affect citizens?

As planned since its last meeting last year, the exceptional program for the purchase of public and private debt due to the pandemic (PEPP), endowed with 1.85 trillion euros, will conclude at the end of this month. The novelty is that, to compensate, the purchases of the program launched in mid-2014 (APP) will increase temporarily, but not until October. Until today, the plan was that they will go from March from 20,000 to 40,000 million per month in the second quarter of 2022, and then drop to 30,000 million per month in the third quarter and return to 20,000 million from October and indefinitely. . Now they will rise from the current 20 billion euros a month to 40 billion in April and 30 billion in May, to return to 20 billion in June. And from there it remains to be seen how they continue.

The fact that the ECB makes massive purchases of debt in the secondary market (among private investors) causes the rates of said debt to drop significantly, by enormously increasing the demand for the securities. This causes, in turn, that the primary emissions made by the States (the debt that the national treasuries sell directly to investors) are also placed with lower interest rates. By lowering the cost of debt, governments have been able to easily increase their spending to combat the effects of the coronavirus (with measures such as ertes, for example). They have thus been able to continue obtaining money (the markets have not stopped lending them, as happened to several countries in the previous crisis) at a price that they can afford to pay (in 2012, for example, Spain had to ask for a bailout to banking because the interests demanded by investors were so high that they would have made public finances unsustainable, with the consequent suspension of payments by the State). The reduction of these purchases, therefore, will make the financing cost of the States more expensive and, as this is the reference for the private sector of their countries, also that of households and companies. It is also foreseeable that the cost of financing in countries like Spain will rise more than in Germany. That is to say, that the risk premium rises (the difference between the interest rate of the Spanish 10-year bond and the German one, which is a reference because it is the safest; it is an indicator of the risk of default in the eyes of the market).

The most relevant announcement made by the ECB is that it will end debt purchases throughout the third quarter if its medium-term inflation forecasts are confirmed. This is a key decision, since the institution has stated that it will raise rates “some time after” ending said purchases and in a “gradual” way. The message is calculatedly more ambiguous than the one it had been using until now (it assured that the rates would rise “shortly after” the purchases were completed, which was usually interpreted as in the following quarter), but it clearly leaves the door open to making money more expensive. . “It may be the week after or months later,” said its president, Christine Lagarde, who clarified that the ECB will change its plans if inflation does not evolve as expected and financing conditions deteriorate significantly.

Interest rates have been at historical minimum levels -zero or negative, depending on the case- since 2016, in an attempt by the ECB to reactivate a euro economy that was still suffering from the effects of the previous crisis. To put it in perspective, the last time the monetary authority of the euro zone made money more expensive was in July 2011, in such an obvious mistake that it had to lower them again in November of that same year. As is the case with debt purchases, rates affect financing costs: if they are low, they make financing cheaper for states, companies and households, while higher rates make it more expensive. If the ECB ends up raising them, those who have a credit will have to pay higher fees when they have to review them, while those who try to get a loan will see that higher interest rates are required. In fact, it is already beginning to happen: the Euribor (the average rate at which banks lend to each other, which serves as a reference for most variable-rate loans) reflects in advance what the official rates are expected to do and it’s going up. The same happens with fixed-rate loans, since long-term public debt is used as a reference to set said interest, which has also been on the rise.

The economic fallout from the Ukraine invasion is a perfect storm for the ECB. Europe’s reliance on Russian oil and gas will further drive up already skyrocketing inflation, which in turn will lead to lower growth. This is a more devilish situation than the one caused by the outbreak of the pandemic, since then the economic recession was accompanied by a collapse in prices due to the collapse in demand, which gave the ECB room to take support measures to the activity. The problem is that the legal mandate of the ECB is limited to controlling inflation (which is at 2% in the medium term) and does not include other objectives (not like that of the US Federal Reserve, which must also promote full employment, but which has still announced that it will raise rates). In other words, the central bank of the euro is practically obliged to take measures to clamp down on prices. Of course, he has urged governments and the European Commission to take fiscal measures to mitigate the economic effects of the war. In addition, he has ensured that the eventual rise in rates will in any case be “gradual” and has left the door open to change plans if financing conditions deteriorate significantly.