Christine Lagarde’s ECB bakes the maxi rate hike of 75 basis points on which the markets had bet, confirming its fight against inflation, which in the euro area rose in August at a rate of 9.1%. The ECB itself it does not provide further assistance to Italy and its BTPsmaking it clear that the anti-spread shield has been baked.
Of course, in case of need, says Lagarde, “We are ready to intervene”but no extra gifts to Italy, and no activation of the new TPI tool.
The Italy risk therefore remains the same, and the BTPs do not like it, with the ten-year rates which, from 3.83% at 2.15 pm (when the ECB announces the maxi rate hike) they take off one step away from the threshold of 4%, up to 3.96%.
Lagarde among other things, it also warns the countries of the euro area, ready to provide new aid to businesses and households, struggling with inflation, in particular with the #caroenergia and the #carobollette.
“Fiscal support measures aimed at buffering the impact of higher energy prices should be temporary and aimed at the most vulnerable households and businesses, in order to limit the risk of further inflationary pressures, and to strengthen the efficiency of public spending, and to preserve debt sustainability “.
Beware of Italy? The country with its monstre public debt remains special, in the midst of an electoral campaign ahead of the political elections on September 25, and while some parties promise endless money to stop the energy crisis.
On the maxi rate hike announced today, equal to 75 basis points, the ECB has brought interest rates on main refinancing operations, on marginal lending operations and on deposits with the central bank will be raised respectively at 1.25%, 1.50% and 0.75%, with effect from 14 September 2022.
READ AND FOLLOW
ECB raises rates by 0.75%, historic move against galloping inflation. Market reaction and Lagarde LIVE conference
ECB, Lagarde admits her powerlessness and makes mea culpa
At the same time Lagarde also admits the impotence of the ECB, giving reason in a certain sense precisely to those who continue to harass the European Central Bank with criticism for the path of normalization of rates – monetary tightening which it has given the way to defeat the scourge of inflation:
“I cannot reduce the price of energy. I cannot convince the big players of this world to reduce gas prices. I cannot reform the electricity market. I am therefore very happy to see that the European Commission is considering various solutions to this end, because monetary policy will not reduce the price of energy “, Lagarde said, highlighting all the limitations of the monetary policy tool. An instrument that is certainly not the magic wand capable of making inflation disappear suddenly, considered as the most cruel tax for consumers and companies.
“US inflation originates in demand – remember the number one of the ECB -, while the inflation of the euro area was instead triggered by the offer ”.
But that’s exactly what he said months ago Francesco Giavazzi, economist, economic advisor and right-hand man of the Prime Minister, Mario Draghi.
“The ECB promised to raise rates in response to rising inflation, with the wrong tool“, aGiavazzi said, according to what reported by Reuters, the economic adviser of Draghi, during a conference that took place in Rome – We are not struggling with domestic demand inflation, as is happening in the United States. We have inflation linked to the (jump) in gas prices ”.
Ditto, today, Lagarde. Who then also made a mea culpa, questioned during the press conference about the big mistake that the ECB made in defining inflation as transitory. But Lagarde also put on on the defensive:
“How is a model that predicts Coronavirus possible? The war in Ukraine? The blackmail of energy (by Vladimir Putin’s Russia) ?. I take the blame; but it wasn’t just us who made mistakes ”.
Certainly, Lagarde went to great lengths to confirm her determination to curb inflation by answering a question about terminal rate (whose determination, in the case of the Eurozone, remains a mystery) saying that, if needed, the ECB could decide to raise rates even further (i.e., given that the extent is unknown?), and stressing that the rate neutral it is neither zero nor equal to where we are now.
“Inflation – he repeated – is incredibly tall, and it is expected to remain beyond our target (2%) for a long period of time ”.
So much so that the central bank staff was forced to revise the outlook on the price flare up (averaging 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024).
ECB, Lagarde and the worst case scenario with total shutdown of Russia gas
That said, the market has mostly discounted the risk of recession, which was illustrated by the president of Eurotower herself.
In the basic scenario, the outlook on GDP – reads the same bulletin of the ECB – “It recorded a marked downward revision for the remainder of this year and for the whole of 2023, settling at 3.1% in 2022, 0.9% in 2023 and 1.9%“.
But there is a decidedly worse scenario, which was elaborated by the ECB economists themselves and which Christine Lagarde presented: the so-called worst case scenario that takes into account a recession for the euro area for the whole of 2023, with a total stop of gas in Russia and energy rationing.
And it is above all here that the euro fell, down by about 0.40% against the dollarturning back from the parity he had feebly grasped before Lagarde’s words.
The single currency also priced the statement with which the Eurotower number one made it clear that today’s monetary tightening, equal to 75 basis points, does not necessarily have to be considered the norm, given that the ECB has not set itself any precise rate to reach, other than the one that will allow inflation to fall towards the ECB target, equal to 2%, from the leap to the annual rate of 9.1% collected in month of august.
Still on the subject of the euro, Lagarde remarked that it is not the role of the central bank to aim for a precise exchange ratio, underlining, however, that theits depreciation contributed to increasing inflationary pressures.
Analysts: Does maxi rate hike work with shock inflation offered?
Wolfgang Bauer, gestore del Public Fixed Income Team di M&G Investments, commented on the ECB’s move in the note:
“ECB: will the biggest rate hike in history be enough to contain inflation?”stressing that, “With its credibility as the guardian of price stability in Europe at risk, the ECB today opted for the largest rate hike in its history. However, it is doubtful that the normalization of the process with today’s first step of 0.75% will have a tangible effect on inflation in the coming months ”.
That is to say? Bauer recalled that “Rising prices of both energy and other commodities are making their way into core inflation as higher input prices force companies to pass the price increases, at least in part, to their customers.”
Consequently, the manager of M&G Investments highlighted the admission of Lagarde:
“This cost-driven inflation, largely caused by supply-side shocks, is very hard to fight with monetary policy tools. To be honest, not even the most ambitious of ECB rate hikes will reopen Nord Stream 1. Arguably, an energy price cap, such as the one now under consideration in the UK, would be the most effective policy tool under these circumstances. truly unique “.
Morgane Delledonne, Head of Investment Strategy Europa di Global Xcommented on the news that emerged today from the ECB:
“The more aggressive attitude taken by Frankfurt is mainly due to the constant increase in energy and commodity prices and the risk that these will affect the cost of daily living and inflation-related expectations, as demonstrated by the significant revisions made on these last for next year. On the bright side, these projections do not point to a recession in the region, but rather a combination of low growth with a high inflation scenario. At Global X, we see interesting moves along the German bond yield curve. Not only did the front end climb 13 basis points as rates hiked, but the long end did the same, suggesting market expectations for inflation and long-term growth have gotten brighter. Following the meeting, the ECB sent mixed signals, but in general it seems that the position of the hawks prevailed. Arguably, the most important point that emerged was the one stressed several times by President Lagarde, according to which inflation forecast at the end of the projection period of 2024 should not be at the 2% target but rather 2.3%. , which could potentially justify more rate hikes, even large ones ”.