Christine Lagarde says the price hike also affects her pocketbook. You notice it in your daily life: when you have to fill up your car, buy diesel for heating or take a look at the price of good bread. With that confession to Frankfurter AllgemeineLagarde responded to the rain of criticism – some even contemptuous – that he has received in Germany for not having taken urgent measures to curb inflation. But Lagarde is no longer just pressured by rising prices. The head of the European Central Bank (ECB) must decide this month on the future of its debt purchase policy, key to maintaining the financing conditions of the countries, just when the recovery is being clouded by the new wave of the coronavirus and the irruption of a new variant.

The Governing Council of the ECB must decide on December 16 if it puts an end to the debt purchase program linked to the pandemic (PEPP, for its acronym in English), endowed with 1.85 trillion euros and that will expire when “ the crisis phase of covid-19 ends “and” in any case, not before the end of March 2022. ” The ECB has already sent signals that it will end the PEPP. The question is whether it will continue the massive purchase of debt, tighten monetary policy or seek an intermediate formula. For now, Lagarde has hinted that he will not postpone the decision: in uncertain times, markets need as much “clarity” as possible.

Hawks and palomas they have been moving token before the council. So far, the most staunch defenders of fiscal and financial discipline believed they had the most powerful argument: once the economic recovery was on track, the price hike, which has reached 4.9% in the euro zone, could be urgently addressed. —And 6% in Germany, the country most sensitive to inflation. But now the southern countries will also be loaded with reasons: neither the pandemic can be considered over, nor the economic recovery for sure. The governors of the banks of Austria and Slovenia, for example, have called for tightening monetary policy, while those of Spain and Portugal have demanded not to do so.

Lagarde has insisted in recent weeks not to “overreact” to an inflation that he considers “temporary”. What’s more, on Friday he compared the rise in prices to a hump and pointed out that it is at its highest point, so now it can only fall. The members of its executive council have also been sending various messages in recent weeks: Luis de Guindos has insisted on the danger of “second-round effects”, in a clear call for moderation to the social agents in salary negotiations; Isabel Schnabel has warned about inflation trying to calm the spirits in the north, while Philip Lane looked to the south when highlighting the efforts that the ECB has made to guarantee the financing conditions. Now comes the time to find the formula to combine all these interests.

The possibilities of the ECB

Before the omicron burst, markets were betting that the ECB would observe the new growth and inflation forecasts, assess that the recovery was still underway and put an end to the PEPP in March. Investors are still betting on that option, especially when inflation seems more persistent than expected and the Federal Reserve has shown signs of accelerating the withdrawal of stimuli. However, new options open up and others close. The director of the Robert Schuman Center and the European University Institute, Erik Jones, summarizes the four possibilities that they now plan: “The question is whether the ECB will create a new purchasing program with the same flexibility to follow up on the PEPP, if it will keep open the perspective of creating it, if it will increase the existing normal program or if it will liquidate the PEPP ”, he details.

Jones predicts that board members will debate whether to extend the PEPP or replace it with some other similar but more open and less time-bound flexible bond purchase program. And that could be done by recalibrating the traditional purchase plan (APP) or with a new one that allows to overcome some obstacles, such as the inability to buy Greek bonds. “It is difficult to think that the ECB, whose objective is price stability, will announce the continuity of the purchase program. You always have room to reactivate it or to use other instruments ”, says Antoni Garrido, Professor of Economics at the University of Barcelona. The economist believes, even so, that monetary policy will continue to be accommodative, since, in addition to price stability, the ECB has assumed de facto as one of its goals the maintenance of the financing conditions.

Frankfurt does not want to repeat the fiasco led by Jean-Claude Trichet just a decade ago, when he decided to raise interest rates in the face of the first spike in inflation. However, analysts also warn that the ECB must calibrate its response to inflation well. “The data exceed the ECB’s forecasts for this year. But it is also likely that the rise in prices will not be as transitory as expected. If there is not a more coherent narrative with the facts, there is a risk of losing credibility “, affirms the director of Coyuntura de Funcas, Raymond Torres.

For now, most analysts believe that the institution will maintain an accommodative monetary policy. “The ECB is going to observe what happens to underlying inflation,” says José García Montalvo, professor in Applied Economics at Pompeu Fabra University. That, however, will require Lagarde to reconcile the two souls on the council using her diplomatic skills. In just over two weeks you should have the dilemma resolved.