Like the Fed, the ECB Is Still a Long Way from “Normal” Monetary Policy

For the first time in more than a decade, the European Central Bank (ECB) raised its key interest rate this past Thursday. The deposit facility rate went from –0.5 to 0.0 percent. The change comes after fourteen months of price inflation in the European Union above the ECB’s 2 percent target. The EU’s price inflation measure hit 9.6 percent in June,1 the highest growth level since the euro became a currency in January 1999, and at least a twenty-five-year high for price growth in the bloc overall. Indeed, price inflation has been near or above twenty-five-year highs for the past nine months. 

The ECB has been a latecomer among the major global economies’ central banks. The US Federal Reserve, the Bank of Canada, the Bank of England, and the Swiss National Bank have all raised their key policy interest rates in recent months (although the Bank of Japan has continued to double down on ultraeasy money). The Federal Reserve has been among the most aggressive—in relative terms, of course—raising the federal funds rate to 1.75 percent last month.

As with the Fed, though, it would be inaccurate to refer to the ECB’s extremely mild efforts at monetary tightening as a “hawkish” policy. The ECB’s policy interest rate has been remarkably low for more than a decade. The last time the ECB raised the rate was during July 2011, when it raised the rate from 0.50 to 0.75 percent. The bank changed direction in October of that year, reducing the policy rate to 0.00 percent by July 2012. The ECB didn’t stop at zero, though; the rate went negative in June 2014, and stayed negative until this week. 

In other words, with a policy interest rate just now getting back up to zero, what is the ECB is doing is not “normalization.” 

The ECB has hinted at normalization, however, and it announced an end to its bond-buying program this past spring and then apparently ended its bond buys—known as the Asset Purchase Programme—in June. Ending this program is a key component of ending quantitative easing in the eurozone. 

Yet the timidity of these moves echoes that seen in the US. In the US, actual reductions in the central bank’s balance sheet have been vanishingly small, and the same appears to be true for the ECB. In other words, “q