Maximum optionality and flexibility on the part of the ECB in the face not of stagflation, but with the war in Ukraine and the Western sanctions on Russia a “slowflation”, ie high inflation with limited and slow economic growth. However, it is growth. And in the face of growing pressure on prices, “a large number” of central bankers of the ECB felt it was time to take “immediate steps towards normalization”, as reported by the minutes of the last Governing Council of 9 and 10 March, published today from the monetary institution and from which the element that shines most is that of high uncertainty. For the record this morning the president, Christine Lagarde, tested positive for Covid-19,
Uncertainty that in Frankfurt is believed to surround both the future of the economy and that of inflation with downside risks on the former and upside risks on the cost of living, which reached a record of 7.5% in March in the euro area. “Prevailing uncertainties have asked the” European Central Bank “Governing Council to maintain maximum optionality and flexibility with respect to the future course of monetary policy normalization. A data-driven approach has been essential to maintain confidence in the ECB’s commitment to the carry out his mandate “, read the minutes of the last meeting, from which we also learn that the Frankfurt Governing Council” highlighted that fiscal measures, also at European level, have played an important role in protecting L’
The war has likely dented short-term economic growth, but annual growth is expected to remain positive even in a severe scenario. However, the greater persistence of inflation has increased the likelihood of second-round effects by strengthening wage dynamics. “Although wage growth has so far remained moderate, it has usually reacted with a lag and possibly in a non-linear fashion, with the increased risk of a wage-price spiral if monetary policy does not act in a timely fashion. Also, a longer period. long inflation above the target would entail an increased risk of an upward detachment of longer-term inflation expectations “, read the minutes.
Certainly a further escalation “could stifle the rebound of the economy in the euro area and jeopardize financial stability”. For this we need “optionality” in monetary policy, so as to leave open “the possibility of taking all necessary measures if the crisis continues to worsen” at a time when investigations have shown that there has already been a negative reaction of businesses and households in terms of confidence and if this were to be combined “with a complete cut in oil and gas supplies from Russia, the heightened uncertainty and risk aversion could lead to a much more pessimistic assessment of the economic outlook than to those presented ”
In this context, the chief economist of the Eurotower, Philip, Lane has formulated the proposal to give an acceleration to the maneuver of gradual reduction of purchases of securities with the remaining App program, towards a stop in the third quarter – whose exact timing is still to be defined – and adding that after “some time”, a formula deliberately left vague, it will be possible to proceed with any increases in interest rates. A strategy, which leaves open a clear option for monetary policy, considered “a balanced and proportionate compromise to pursue the objectives”.
While banks and supervisors today expressed concern about the implementation of sanctions against Russian oligarchs following the invasion of Ukraine, as they vary in scope and to whom they turn in different jurisdictions: ” sanctions are not the same in Europe as in the United States or Great Britain or Japan, “said Mercedes Olano, Director General for Supervision of the Spanish Central Bank, adding that talks are underway to clarify how financial institutions should act. recession risks in the euro zone are increasing, with inflation seen reaching another peak as the conflict between Russia and Ukraine continues to fuel the rise in prices ofenergy and food products, just as the ECB is about to raise its deposit rate by the end of the year.
Well, out of 41 of the 53 respondents in a survey conducted by Reuters between 1 and 6 April who estimated this year an increase in the deposit rate from historic lows to -0.50%, 31 of them predict that the increase will occur in the fourth quarter, while ten expect the maneuver between July and September, up from six in the March survey. No one has predicted an increase by the middle of the year. However, the room for maneuver for the ECB is shrinking, with a median probability of 30% for a recession this year, given the vulnerability of the euro zone due to the proximity of war between Russia and Ukraine. Respondents who predicted a continuation of the economic recovery in March, with the reopening of activities once the wave of the Omicron variant of covid-19 has passed,
TD Securities expects the ECB to accelerate the elimination of the QE program so that it ends in May rather than the third quarter, as announced in March. “This would prepare markets for an interest rate hike in June,” said TD Securities, noting that a move like this to accelerate monetary policy tightening “would have a substantial impact on bond markets as it could add fuel to the fire. in promoting volatility “. At the moment the yield of the 10-year BTP rises to 2.361% with the BTP / Bund spread almost stable compared to the opening at 166.8 basis points. Morgan Stanley sees it at 185 basis points by the end of the year, but believes there is a risk that it will test this level as early as June. given a more aggressive ECB and given the peak of BTP emissions by June. (All rights reserved)
