For more than ten years, ECB monetary policy has been ultra-expansionary, whether there was crisis, a recovery, economic growth or stabilization. The worst excuse of all that was used to justify endless quantitative easing has been the often-repeated mantra that “there is no inflation.”
Defenders of aggressive monetary policy have always used the same arguments really.
If we looked at most investment bank outlook reports for 2021, one of the main consensus themes was a strong conviction on a rapid and robust eurozone recovery. They were wrong.
This week, Capital Economics joined other analysts and downgraded the eurozone growth, highlighting “We now think that the euro-zone economy will recover more slowly than we previously anticipated, growing by about 3% this year and 4.5% in 2022. Meanwhile, euro-zone government bond yields seem unlikely to fall much further, and with Treasury yields set to increase significantly, we expect the widening yield gap to cause the euro to weaken against the US dollar”.
Central banks do not manage risk, they disguise it. You know you live in a bubble when a small bounce in sovereign bond yields generates an immediate panic reaction from central banks trying to prevent those yields from rising further. It is particularly more evident when the alleged soar in yields comes after years of artificially depressing them with negative rates and asset purchases.