Other than an about-face and repentance of an ECB that has realized that it has been too much – for its critics – hawkish with rates.
The central bank led by Christine Lagarde raises the main reference rates in the euro area, at the same time destroying the hopes of those who were starting to believe, also thanks to some rumors reported in recent weeks, that in subsequent meetings, starting from the same scheduled in March, the moves would be less aggressive.
And yet nothing.
It is written clearly and roundly in the press release:
The Governing Council today decided to raise the three key ECB interest rates by 50 basis points and expects further increases. In light of underlying inflationary pressures, it intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March, and then assess the subsequent evolution of its monetary policy. Keeping interest rates at restrictive levels will reduce inflation over time by curbing demand and will also protect against the risk of a persistent increase in inflation expectations.
Not only does Lagarde not take a step back, but she insists on its monetary tightening recipe of 50 basis points, also expected for the month of March.
As stated in the statement issued by the ECB, “The Governing Council has decided to raise the three key ECB interest rates by 50 basis points. Therefore, the interest rates on the main refinancing operations, the marginal lending facility and the deposit facility will be raised respectively to 3.00%, 3.25% and 2.50%, effective February 8, 2023”.
Regarding the QT plan, Eurotower confirmed in the statement that “The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities repaid under the APP until the end of February 2023. Thereafter, the APP portfolio will be reduced at a measured and predictable pace, as the Eurosystem will only reinvest part of the principal repaid on maturing securities. The pace of this reduction will average €15 billion per month until the end of June 2023 and will then be determined over time.
The issues of inflation, growth, rates, QT, were all extensively explained by Christine Lagarde during the press conference following the Eurotower announcement on rates:
despite Italy’s appeals and criticisms, the ECB’s number one has returned several times on the need to win the battle against the flare-up in prices, far from finished, confirming the intention to raise rates by another 50 bps at the next meeting in March. And this, although “We believe that (Eurozone GDP) growth will remain weak.”
For those who had any doubts, Lagarde went even further, emphasizing di “failing to think of any scenario in which a 50 basis point tightening could not materialize, short of rather extreme cases“.
In short, for now, “in all reasonable scenarios” one thing is certain: Eurozone interest rates still need to be raised significantly and steadily.
Then, when the terminal rate is reached, it will be necessary to remain at those high levels “for a sufficiently long period of time”, such as to allow inflation to return to the (ECB) target of 2%-
As Ben Laidler, global markets strategist at eToro commented on the outcome of today’s ECB meeting:
“The European Central Bank (ECB) kept pace on interest rates by raising the deposit rate for the sixth consecutive time. The 0.5% increase to 2.5% puts it at its highest level since 2008. The ECB is also clearly signaling another 0.50% hike in March, which sets it apart from other central banks globally who are now resetting their battle against inflation.
From eToro they remember that “the ECB started raising rates later, raised them less, inflation is still at 8.5% and the economy is surprisingly resilient. Economic growth is supported by the collapse in natural gas prices, public spending and export growth, as well as the benefits of China‘s reopening”.
Ben Laider’s opinion?
“We believe that the ECB is capable of raise rates another 1.0% at the March and May meetings, before peaking later in the year, well behind most other major banks. This outlook has been a key support for the EUR/USD pair’s recent rally to 1.10″
High tension between Lagarde and the Meloni government
At this point, the reactions of economists, strategists and also of the Meloni government are awaited, after the high tension between Giorgia Meloni’s Italy and Christine Lagarde’s ECB, which literally exploded on ECB-Day on 15 December 2022, the last act of the Eurotower of the year when, in addition to raising interest rates, the he ex-IMF chief has rattled the nerves of markets by promising more aggressive tightening.
Not only that: that day, the European Central Bank also announced the go-ahead for the anti-inflation bazooka QT-Quantitative Tightening .
In doing so Lagarde has become the official target of a certain Italian policy, ending up in the sights of the defense minister in particular Guido Crosetto.
The attack was also immediate by the Infrastructure Minister Matteo Salvini
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The nightmare BTP-Bund spread is back on the markets, over shot over the 200 markdue to rates on ten-year BTPs that have flared up flying even beyond those with the same maturity as Greek bonds
The double slap in the face of the QT-rate hike – in reality not only to Italy, but to the entire euro area if we want to talk about this – has unleashed the anger of a some Italian politics.
Not only the ECB, there are the Fed and Bank of England verdicts
Meanwhile, the financial markets continue to digest what emerged from FED-Day: yesterday the Federal Reserve (Fed), the American central bank led by Jerome Powell, announced that it had raised US interest rates by 25 basis points, to the new range included between 4.5% and 4.75%, a record since October 2007.
The announced increase was the eighth since the US central bank started raising rates, in March 2022.
Although the Fed helmsman has repeatedly tried to reiterate his firm intention to continue the fight against inflation, someone has talked about a dovish breakthroughreferencing both his strange response and other statements and admissions.
It was the central banker himself who recognized that “We can now say, I believe for the first time, that the disinflationary process has begun”.
Bank of England as expected. The quote about peak inflation
Today, in addition to that of the ECB, the announcement of the Bank of England, also in the spotlight in the last few hours with its announcement on UK rates.
As expected, and despite the nightmare recession gripping the country, the UK central bank raised rates by 50 basis points to 4%the highest value in the last 14 years.
Said this, from the BoE itself came the hope that the cycle of aggressive monetary tightening, not just in the UK, is nearing its end. So does the central bank.
Inflation as measured by the consumer price index globally remains high, although it is likely to have peak-tested in many advanced economies, including the UK. Wholesale gas prices have fallen recently as disruptions affecting supply chains have eased somewhat due to global demand. Many central banks have continued to raise rates, although the market prices a rate cut going further.
Taking stock of the situation, it should be said that Christine Lagarde’s ECB is the one that, among the three central banks, has every intention of continuing to show its claws against the scourge of inflation.
Lagarde replied with a ready no even to those who asked if, perhaps after March, the ECB’s monetary policy will finally be able to stop the rate hike. None of this. Indeed, the ECB continues to reproach all those governments of the Eurozone which, with their fiscal stimuli, they help families and businesses to cope with the blow of high energy prices.
The “fiscal aid against high energy costs could exacerbate inflation and require a stronger response” by the ECB. A real warning.