The price flares are more persistent than expected, and to think that there is an automatic turnaround is wrong. The European Central Bank (ECB) launches another alarm on inflation dynamics. According to the minutes of the last meeting in early September, published yesterday, “inflation has been repeatedly higher than expected, and the upward pressures on prices will not come down on their own”. Therefore, new interest rate hikes will have to come, following the 50 basis point hike in July and the 75 basis point hike a month ago. The battle ahead of October 27, the date of the next meeting, has already begun. On the one hand, the most aggressive countries, such as Germany, Holland, Austria and the Baltics. On the other hand, those who will ask for more gradual normalization, such as Italy and Greece.
The report from the latest ECB meeting highlights that the eurozone is in a complicated situation. In the minutes it is emphasized that “putting too much emphasis on supply-side problems risks neglecting the fact that it is necessary to act on demand to bring down inflation”. For chief economist Philip Lane, the role of demand is higher than before. And this is an element that jeopardizes the anchoring of expectations, as well as the Eurotower compass to control and mitigate the price pressure on consumers. The admission that there is a risk of going out of phase is subtle. But there is. “Inflation was too high, it will probably remain above the Governing Council’s target for an extended period,” the text reads. Not only that: “The expected weakening of economic activity would not be sufficient to reduce inflation significantly and in itself would not bring the expected inflation back to the target”. Furthermore, in the event of a total shutdown of the Russian gas taps, the ECB has highlighted that 2023 will coincide with the recession in the euro area.
On the financial markets, with Milan very weak, there was a slight tension on the yields of European government bonds. The British 10-year rate was running, rising to 4.2%, with an increase of 18 basis points. The spread between BTPs and Bunds stood at 242 points, compared to 243 at the time and 240 at the start of the session. The yield of the Italian 10-year rises to 4.5% (+5 basis points). The rates of the peripheral countries of the euro area also increased, with Spain at 3.78% (+5 points) and Greece at 4.72% (+6 points).
Meanwhile, weapons are being refined for the next increase in the cost of money. In the last meeting some members of the Board asked for a 50 basis point increase, but at the end of the discussion all the members agreed on the 75 basis point increase. As Christine Lagarde remarked several times, every future decision will be taken “from meeting to meeting on the basis of macroeconomic data”. By the end of the month, therefore, in the event of further pressure on prices, a further increase of 75 basis points cannot be ruled out.