12 Sep 2020 2 min

The ECB goes its own way

There is now a gulf between the monetary policy objectives of the FED and those of the ECB.

Last week, Jerome Powel focused his entire policy discourse on the future monetary policy of the FED openly talking about full employment and growth, with respect to which he removed any inflationary constraints.

Yesterday, however, Lagarde specified that neither growth nor unemployment are objectives of the ECB, which is focused on price stability.

No attention to the eurozone inflation rate that the bank itself predicted at 0.3% in 2020, 1.0% in 2021 and 1.3% in 2022, nor concerns about the excessive appreciation of the euro against the dollar. Moreover, Lagarde made it clear that currency exchange rates are not monitored by the ECB either.

On the subject of growth, Lagarde even expressed optimism that Europe's GDP would fall "only" by 8% compared to expectations of -8.7% and projected a recovery of +5% in 2021 and +3.5% in 2022, underlining that it will take at least 3 years to return to pre-Covid GDP levels.

Thus, the rate on deposits remains at -0.5% and the Pandemic Emergency Purchase Programme (PPEP) remains set at 1350 billion, and will be diluted monthly until 2021.

By acting in this way, the ECB confirms that it is not a real central bank but an interbank market stabilisation fund whose sole objective is banking union.

The main beneficiaries of this situation will be the US equities and precious metals and the FED which will continue to devalue the dollar allowing the US Treasury to correct its trade deficit. The real economy of the Eurozone, which will continue to import deflation, will pay the bill.