The front that wants two substantial interest rate hikes by the European Central Bank (ECB) is strengthening. In February and March, to be precise. After Klaas Knot, governor of De Nederlandsche Bank, the national bank of the Netherlands, now are Joachim Nagel, number one of the German Bundesbank, Gabriel Makhlouf, president of the Central Bank of Ireland, and Boštjan Vasle, head of the Slovenian monetary institution, ask for more reactionism from Frankfurt. The “mantra” dictated by Christine Lagarde from the World Economic Forum in Davos has been taken at their word by numerous policymakers, who are defending their position against price flare-ups.
There is a specter that has been hovering over the euro area since mid-December. It’s about China. With the end of the restrictions to stem the infections from Covid-19, it is possible that the demand for energy – whether it is crude oil or natural gas – will soar. And therefore, new pricing pressures. Those who are not energy independent will pay the price. Like Europe. Against this, the ECB’s line provides for the maintenance of a precise restriction of the existing liquidity. That is to say, at least two more interest rate hikes after the 250 basis points recorded in 2022 starting in July. “The ECB’s interest rates are set to rise further and it would not be surprising if the monetary tightening initiated by the Eurotower continues even after March,” said Joachim Nagel, president of the Bundesbank, to the German newspaper The mirror. “For February and March”, underlined the German central banker, “we announced that we will raise rates again significantly. We will then look at where inflation lies in the spring and where our forecasts point to. I wouldn’t be surprised if we have to continue raising rates even after these two already announced steps.
Words, those of Nagel, which have not been isolated. On the contrary, a week before the Governing Council of the ECB, there were several central bankers who said they were concerned about the dynamics of inflation. Not so much the “general” one, as the “background” one, or Core, net of energy and food. Which instead of contracting, is rising. “December data confirms that the rises in core inflation are not over yet,” Irishman Makhlouf explained. And it is for this reason that there should be “two more increases similar to that of December both in February and in March,” he said. That is, another 50 basis points for the next two meetings. Parallel trajectory that of the Slovenian Vasle, who asks for a similar approach.
On the day when the “hawks” make their voices heard, the positions of those who ask for more gradual increases become more blurred. The guideline undertaken by Lagarde, and vigorously reaffirmed in Davos, is that of a clear path made up of increases until May. Then, in June, there will be the overall assessment of the first year of a new normality, with rates returning positive after more than a decade of negative interest. The macroeconomic conditions, net of the uncertainty due to the war in Ukraine and the Chinese energy demand, permit it. The recession that will be, according to the latest available data, will be milder than expected. And therefore the absorption of rate increases may also be more manageable by those countries with limited fiscal space, such as Italy and France. A factor, according to the Northern front, which makes it possible to use the weapon of monetary policy to maintain price stability.
“We shouldn’t declare inflation victory too soon, as I still see upside risks to the price outlook. And therefore there is no reason to deviate from the route traced by Lagarde”. Nagel, conversing with Spiegel, is cautious against soaring prices. At the same time, however, the implications for the real economy may not be clear. For now, they’ve been limited. But the call for gradualness requested by Rome, Lisbon and Athens cannot be ignored. According to Vincent Mortier, head of investments at Amundi, the rate on ECB deposits could rise to 4%, and this would imply a series of bad debts for many European consumers. But, as emphasized by the more orthodox front of the ECB Board, the priority is to deal with the most unfair tax of all, ie inflation. The February meeting, which was supposed to be – as explained by more than one observer – very interlocutory, could be more divisive than expected.