It is ECB Day, the day on which the central bank chaired by Christine Lagarde will most likely announce that, in July, euro area rates will be raised for the first time in more than ten years, in order to avoid further flares of inflation. This is practically the beginning of a new era of monetary policy, as defined by a Bloomberg article, which will first of all sanction the end of the rain of money that has poured into the bloc markets in recent years, guaranteeing lymph. vital to government bonds that had been the subject of speculation during the sovereign debt crisis, which risked shattering the euro. This is an epochal turning point that will sweep away, in particular, the two pillars on which the European Central Bank’s strategy is based: negative rates (with the deposit rate which still remains equal to -0.50%) and Quantitative easing, or the monetary bazooka with which the ECB bought up BTPs, Bunds and other public debt securities of euro countries.
Shopping has been so rampant that the FT recalled a few days ago how, in recent years, the ECB has put € 4.9 trillion of bonds in its belly, for a total of more than a third of the GDP of the area. euro, since the program was launched in 2014 to save the Eurozone. The Quantitative easing plan bears the signature of former ECB president and current Prime Minister Mario Draghi. Do not forget the pandemic QE, or the PEPP, with which the ECB has made further purchases of securities to save the Eurozone from the disastrous consequences of the Covid-19 pandemic.
With inflation that, in the Eurozone, continues to march fast, even Lagarde was forced to send to the attic the various dovish instruments that various critics have had no qualms about defining drugs or monetary inflation that have distorted asset prices not a little. with respect to their fundamentals. The new outlook that Lagarde will present to the markets today will be fundamental: the new economic projections – crucial are those relating to GDP and inflation measured by the consumer price index.
Those will be the foundations on which the next choices on rates will rest, which some see returning to positive territory (with reference to deposit rates) as early as July, with a monetary tightening of 50 basis points.
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In this regard, the economists of Bank of America expect two rate hikes, each of 50 basis points, during the third quarter of the year; on the other hand, most economists estimate a tightening of only 25 basis points, both at the meeting on July 21 and in September.
For her part, Lagarde called Russia’s invasion of Ukraine a pivotal moment, which could represent the “peak of hyper-globalization” while speeding up the ecological transition, both consequences that would imply more lasting inflation. You yourself spoke of a trajectory of rates which, by October, should signify the end of negative rates and the return to a more “normal” policy. But will the euro area economy – this is the main doubt that haunts economists – will withstand the brunt of such a powerful turn in monetary policy?
On the other hand, it is the same question that is constantly circulating in the United States, where the term inflation is increasingly accompanied by the words recession, stagflation, hard landing. In the last few hours the International Monetary Fund’s turbulence risk alert has also arrived which, among other things, said that the real question is not asking whether inflation has peaked, but another.
In the meantime, the markets are talking, and the message they send is not the most comforting: the BTP-Bund spread has risen above 200, to the highest since the period in which the Covid pandemic exploded. The rates on ten-year BTPs travel above 3%. “The impression is that the Governing Council (of the ECB) wants to demonstrate that it is acting on inflation even in the face of risks to growth – commented Evelyn Herrmann, economist at Bank of America in Paris. – And this is a discussion that mainly ignores the risk that inflation could move in the opposite direction ”. On the other hand, a characteristic feature of the Eurozone, the same that led Mario Draghi in 2012 to launch the “Whatever it Takes” was the persistence of deflation in the bloc.
After having denied the danger of inflation for months, President Christine Lagarde woke up, however, and even suddenly (as did her colleague Jerome Powell).
And now we have it: today both the announcement concerning the end of the APP (traditional quantitative easing program, with which the ECB has made purchases of government bonds in recent years) should arrive and, most likely, the anticipation of the first rate hike in more than 10 years, in the Eurozone, expected in July. Regarding the Italy case, the FT reported on the basis of some rumors that the European Central Bank is however oriented “to strengthen its commitment to support the debt markets of vulnerable Eurozone countries, in the event that they are hit by a sell-off as it prepares to raise rates for the first time in more than a decade.
Most of the 25 members of the Governing Council should support a proposal aimed at creating a new bond purchase program, if necessary, to prevent the financing costs of member countries such as Italy from spiraling out of control ”.
HERE all the details.
So highlights David Marsh, president of OMFIF., Referring to the challenges that await Italy, in a context in which public opinion is exploded with the Goldman Sachs report, which spoke of debt sustainability risk with elections of 2023
“Skepticism is growing about the power of the Draghi government, which took office in February 2021, to carry out economic reforms, especially to implement those innovative projects financed by the Next Generation EU (and engraved in the PNRR), before the next political elections scheduled for the beginning of 2023 “.
“The risk of failure, for Draghi, now exceeds the prospects of success”. And the truth is that “in view of a further stalemate in politics, virtually almost any possible governing coalition that emerges next year could undermine stability,” Marsh pointed out. And this, the ECB knows well.