The European Central Bank will tighten monetary policy step by step

With the inflation level in the euro zone and the expectation of the Federal Reserve's aggressive interest rate hike rising, more and more European policy makers are calling for a drastic tightening of monetary policy, and the financial market is also fluctuating violently. On February 14th, when attending the meeting of the European Parliament, the President of the European Central Bank Lagarde reiterated that he would not raise interest rates  before  the  end of debt purchase.  This  remark suppressed hawkish expectations and caused widespread market concern.  Zhao Xueqing,  a researcher  at  the Bank of China  Research  Institute,  believes  that  the  European Central Bank will not raise interest rates until it finishes its bond purchase, and will tighten monetary policy step by step.

Inflation has exceeded the target level for seven consecutive months, and the European Central Bank's policy stance has changed. In January 2022, HICP (Harmonized CPI) in the euro zone increased by 5.1% year-on-year, the highest level in history. The central bank governors of Germany, Portugal, Belgium and other countries warned that the inflation level may exceed the expectations of the European Central Bank. Since February, the European Central Bank has gradually changed its policy stance, reaffirmed its unwavering commitment to curb inflation and no longer completely ruled out the possibility of raising interest rates. Klass Nott, a member of the European Central Bank's governing committee and the governor of the Dutch central bank, said publicly that the interest rate hike process should be started as early as October this year.

Against this background, more and more investors are worried about the radical actions of the European Central Bank. The exchange rate of the euro against the US dollar rose to 1.15 from 1.12 at the end of January, and the yield of 10-year German government bonds returned to positive 0.2%, the highest level since December 2018. According to the data of currency market transactions, the European Central Bank will raise interest rates by 50 basis points in 2022, which means that the market expects that the euro zone will enter the era of zero interest rates from negative interest rates.

The market expects the European Central Bank to act step by step, and March is the critical period for policy evaluation and market fluctuation. The European Central Bank may end the net purchase of PEPP in March and the net purchase of APP in June. Since the epidemic, the European Central Bank has not lowered the policy interest rate. Monetary easing mainly depends on "quantity" rather than "price". There is a high probability that the interest rate will not be raised before the end of the bond purchase process. The relevant annual economic forecast of the euro zone will be completed in March. Based on these data, the European Central Bank reassesses its monetary policy path, and the market expectation may change rapidly. The interest rate of European bonds will rise in stages, which does not rule out the possibility of large selling of bonds of some member countries.