A Dependent ECB Following the Fed
During the latest ECB meetings, members expressed greater concern over the dynamics of economic activity than over inflation trends. Downside risks to growth have increased, particularly for consumption. Geopolitical risks, escalating trade tensions impacting exports, and the effects of monetary tightening are expected to prompt a strong response from the ECB to support the economy. According to Y. Stournaras (Governor of the Central Bank of Greece), the increase in U.S. tariffs could even lead to a recession and a period of medium-term deflation. Wages, which had previously been a concern for controlling inflation, appear to be stabilizing in most countries. This normalization will take time, but we anticipate a more pronounced slowdown this year amid low economic activity.
It seems as though the period of high inflation and sustained elevated interest rates is now obsolete, and we can henceforth envision a phase of much lower rates without fear.
In her New Year’s address, the ECB president expressed strong confidence in inflation returning below 2%.
Monetary policy should therefore ease significantly and swiftly to support growth. And yet, a second-order analysis proves far from straightforward.
Indeed, the monetary policy of major central banks must also react in coordination with their counterparts to avoid creating excessive imbalances. Like many other central banks (China, Japan, the UK), the ECB cannot ignore the stance of the Fed.
And it is through this lens that the situation appears more complex.
Unlike other regions, U.S. statistics have demonstrated the resilience of the economy. The campaign promises of candidate Trump are likely to further improve their situation. The American economy continues to withstand challenges. Inflation could pick up again and reverse the disinflationary trend that has been underway for several months.
The Fed should be able to bide its time before assessing the effects of the economic policies to be implemented by Donald Trump, but the risks of a complete 180-degree shift in monetary policy are no longer an absurd scenario.
So then, under these circumstances, will the ECB be able to implement the accommodative policy that the eurozone needs?
We believe that the U.S. situation will likely temper its ambitions, at the risk of seeing its currency weaken and once again being hit by inflation driven by imported energy products. The supply shock Europe endured is not so far behind us, and its scars remain fresh in people’s minds. The ECB will still need to act much more cautiously than it otherwise should.
The ECB may be independent from member states and political power, but it has become dependent on the Fed.
