10 Mar 2022

Jan Krahnen: “The ECB must keep a level head”

SAFE Director sees the European Central Bank’s (ECB) current monetary policy decision as a necessary restraint given the difficult economic situation

At its recent meeting, the ECB’s governing council did not deviate from its previous monetary policy stance, and key interest rates thus remain unchanged. The bond-buying volume was also made subject to conditions. Jan Pieter Krahnen, Director of the Leibniz Institute for Financial Research SAFE, comments on this decision as follows:

“Under the impact of the Ukraine conflict, it is important that the ECB focuses on conditionality with today's decision, thus keeping a level head, and not allowing itself to misinterpret the difficult economic situation. The calls for changes in financing conditions that have been voiced in recent weeks interpret the acute price shock as part of a mutually fueling process of wage and price increases, the so-called wage-price spiral.

This interpretation can be contradicted, however, because there has been little movement on the wage side so far, but there has been a drastic change in relative prices. The price shock alone, especially in energy prices, does not yet constitute an inflation signal, because inflation describes the constant change in the price level and not a one-off price shock. Today’s decision by the ECB, not only to maintain its room for maneuver, but also to expand it, while at the same time signaling its unchanged orientation toward the inflation target, also fits in with this.”