Home » The ECB is not afraid of inflation and is postponing any choice to December, to the disappointment of the markets

The ECB is not afraid of inflation and is postponing any choice to December, to the disappointment of the markets

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All postponed to December. The European Central Bank (ECB) chooses the path of prudence and prefers to wait for new data to understand if inflation is caused by transitory phenomena, as is now believed, or persistent. A message, that of President Christine Lagarde, which took analysts and investors by surprise, who on the eve of today’s meeting expected greater transparency on a crucial aspect for the post-Covid restart. The flare-ups on prices have been going on for months and the fear is that securing the eurozone against them can no longer be postponed.

The consensus of the financial markets was all lined up on one side. That of adaptive pragmatism. Like the one carried out by Janet Yellen during her tenure at the US Federal Reserve. But no. Lagarde, and with her the Frankfurt Governing Council, opted to buy time. Another month and a few days to decide how to act against the inflationary spiral that is enveloping the euro area. A spire that began in spring, but which was supposed to fade in late summer. We are now in November and there has been no decline. However, the ECB continues to reiterate that there are no dangers for the medium term. Over the course of 2022, prices will return to around 2%, a historic target for Frankfurt. The dynamics, according to the ECB, are still under control.

On the most difficult front, that of inflation, Lagarde seems to have clear ideas. The greatest pressures come from energy prices, which are considered by the ECB as temporary. “The current inflation phase will last longer than expected,” Lagarde said, but it will return to decline over the next year. This is because the factors that are driving up energy prices are to be seen as a one-off trend. Up to a point though. As Lagarde admitted, perhaps for the first time since the beginning of the commodity crisis that is engaging the eurozone in a fight for the stability of the recovery, “if the bottlenecks in the global supply chain were to continue longer, and were to pass on to wages, price pressures could be more persistent ”. In other words, the European economy could have immediate consequences in the course of 2022. A factor capable of making the restart of the euro area more fragile and uneven. For now, despite a debate considered “intense” by ECB sources, there have been no significant deviations from the policy adopted in the last 4 months.

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The direct consequence of the ECB’s approach is reflected in the pandemic measures. For now, no changes to the Pandemic emergency purchase program (Pepp), the plan for the purchase of public and private eurozone securities launched in March 2020 to tackle the negative effects of the Covid-19 pandemic on the euro area economy. It is expected to end in March 2022, but market expectations are for an early closure. And in this case, December could be the occasion for the change of pace, albeit gradual, towards the Asset purchase program (App). Much will depend on the epidemiological evolution. But Lagarde said that “in my vision the Pepp will end as planned, in March 2022”. A concept repeated several times during the press conference. Too bad it is in contradiction with what was said recently by the number one of the ECB. In fact, at the beginning of September, while discussing with Klaus Schwab, number one of the World Economic Forum (Wef), Lagarde explained the basic concept of the ECB’s monetary stimulus policy: “You have to be surgical: it is no longer a question of massive support, of targeted support for those sectors that have been seriously damaged “. Translated, only the segments still in difficulty will be helped. A recalibration, in other words. Woe to call it “tapering”, or restriction of stimuli, as Lagarde pointed out in the question and answer session with journalists. Too bad that today there was a partial, but significant, reverse. An attitude that the financial markets did not like.

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To date, according to the ECB, the main reason why it was not decided to intervene is energy prices. Yet the term “inflation” is mentioned 24 times in Lagarde’s speech. Not a few. The values ​​will continue to be monitored, but for now, according to the ECB, they do not represent a huge problem. Yet not a few global central banks are tightening their monetary policy. Canada first, then Brazil, while in the coming weeks the United States and the United Kingdom will cut stimulus, precisely because of the galloping inflation on a global scale. The ECB has decided to wait. Financial analysts and institutional investors continue to be skeptical of this approach. And the direct answer was on the bond market, with the Italian BTPs that observed a rise in yields after Lagarde’s words. The danger in financial circles is that today was a missed opportunity for the ECB. From now until December, it will be understood who was right.

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