On the day of resignation of Prime Minister Mario Draghi, in an Italy shaken by the government crisis, Christine Lagarde’s ECB announced the long-awaited anti-fragmentation shield of the euro area, known in Italy as anti-spread shield or save BTP, baptized by the Eurotower TPI (Transmission Protection Instrument, TPI). With the disintegration of the Draghi government – considered in itself a guarantee against market speculation and maximum expression of the #WhateverItTakes necessary for Italy, negligent on reforms for too many years – the ECB has not churned out an ad hoc shield for Italy, which has shot itself in the foot by itself. And she didn’t bake not even an ad hoc instrument for the indebted countries of Southern Europe.
Rather, the ECB has launched a tool for all euro area member countries: “All euro area countries will have access to the monetary policy transmission protection instrument”announced Christine Lagarde, number one of the ECB, in the press conference following the announcement of the European central bank, who arrived in the midst of yet another government crisis that exploded in Italy.
Euro area interest rates were raised today by the ECB for the first time in 11 years, with a squeeze of 50 basis points: the monetary tightening was therefore double compared to what had been anticipated by the ECB itself last month. The reason for the more hawkish move was illustrated by President Lagarde herself, and it is twofold: on the one hand, upside risks to inflation, who have grown taller; on the other hand, the need for ensure the transmission of monetary policy in the Eurozone countries. What will happen in September it is written in black and white in the ECB statement:
“In the next meetings of the Governing Council it will be appropriate further normalization of interest rates. Anticipating the exit from negative interest rates to date allows the Governing Council to move to an approach where rate decisions are made on a case-by-case basis. The future evolution of the reference rates defined by the Governing Council will continue to be guided by data and will contribute to the achievement of the 2% inflation target in the medium term “.
Both the TPI anti-spread shield and the rate hike, Lagarde said, were unanimously approved.
On the interest rate front, in a detailed commentary, Carsten Brzeski, Global Macro Head of Ing:
“‘The increase, as well as potential further increases, are all aimed at reducing inflation expectations as well to restore the damaged reputation and credibility of the ECB in the fight against inflation. Today’s decision shows that the ECB is more concerned with this credibility than with the need to be predictable ”.
In this way, with a more aggressive rate hike than expected, the ECB has closed the door to the era of negative rates. Lagarde & Co have therefore decided to act with greater determination, against war inflation that jumped last month in the euro area at an annual rate of 8.6%, more than four times the ECB inflation target of 2%.
On one of the most traumatic days in Italian history, the ECB did what it promised last month: churned out the TPI anti-spread shield.
However, during the press conference following the announcement of the new measures signed by the European central bank, Lagarde made it clear that the ICC will certainly not be the godsend that Italy and other countries with a high debt-to-GDP ratio Eurozone have been accustomed to receiving. In short, no free meal. No free meal, much less in favor of Italy, which he dared to disavow the Draghi government. The activation of the ICC will be at the discretion of the Governing Council of the ECB as, as Lagarde said, “We will not be hostage to anyone”.
Furthermore, if it is true that no ex ante limits will be placed on its size and therefore to its eventual firepower, it is equally true that, for its activation, it will be necessary that the country that wants to access it satisfies four very specific parameters:
- compliance with the tax rules of the European Union.
- The absence of serious macroeconomic imbalances
- Fiscal sustainability, therefore sustainability of the debt trajectory
- The presence of solid and sustainable macroeconomic policies
The ECB has made it clear, among other things, that those who request the activation of the #TPI, could also incur a stigma, given that “The Governing Council would rather not use (the #TPI tool), but he will not hesitate to use it in case of need “.
The ECB statement states that:
“The Governing Council considered it necessary to establish the ICC in order to support the effective transmission of monetary policy. In particular, as the Governing Council continues its normalization process, the ICC will ensure that the monetary policy stance is transmitted in an orderly fashion across all euro area countries. The Governing Council’s unified monetary policy is a prerequisite for the ECB to fulfill its mandate to maintain price stability. The ICC represents a further tool available to the Governing Council that can be activated to counter unjustified, disordered market dynamics which seriously undermine the transmission of monetary policy across the euro area. The extent of ICC purchases will depend on the severity of the risks for the transmission of monetary policy. Purchases are not subject to ex ante restrictions. By safeguarding the transmission mechanism, the ICC will allow the Governing Council to more effectively fulfill its mandate to preserve price stability “.
“In any case – the ECB added – flexibility in reinvesting the repaid capital on the portfolio’s maturing securities of the pandemic emergency purchase program (PEPP) remains the first line of defense in order to counter the risks for the transmission mechanism associated with the pandemic ”.
At 3.45 pm, on the ECB website, it was issued a separate press release dedicated to the details of the ICC
So commented on ECB Day Manuel Pozzi, Investment Director of M&G Investments:
“The ECB meeting is part of a decidedly complex context, with inflation that seems out of control and unpredictable in its trend, the war in Ukraine that continues and is at the gates of Europe, the persistent difficulties, if we are not even talking about war, on the side of gas supplies from Russia, as well as the logistical problems related to supply chains more generally, which affect almost all product categories, and the impact of Covid. As if that weren’t enough, it adds to this the Italian political crisis overt yesterday but also that in the United Kingdom, in which the Conservative party is looking for a new leader, and less governability in France after the result of the recent elections. All of this has meant high unpredictability for interest rates. We think that, only in June, the German Bund reached 1.8%a level in any case still low compared to inflation expectations “.
Pozzi continued, stating that “President Lagarde came to the decision to hike from 50bps instead of 25bps on the grounds that there have recently been major price hikes that were previously only potential risks, such as large wage increases. There is now talk of normalization of monetary policy and the ECB intends to follow this path from now on. However, a change of speed, a stop, a change of course will always be possible, but only if supported by valid reasons. The President also said that from September all central bank decisions will be based on data. The unanimous introduction of an additional monetary policy tool for groped to contain speculation and excessive increases in spreads, the TPI, that in Lagarde’s words it could become very broad if circumstances warrant it, is excellent news in the short term ”.
Basically, “Overall, the ECB must therefore take into account a great deal of uncertainty and unpredictability. Consequentially, the watchwords for savers will be caution and diversification (between fixed and floating rate, quality and sustainability of securities, value approach) and progressiveness in carrying out their investment plans. We must always remember that it is precisely in these market phases that opportunities are created, and we have already begun to see some of them on selected equity and credit markets “.
He also commented on the ECB’s double move – rate hike and TPI shield announcement – too Morgane Delledonne, Head of Investment Strategy Europa di Global X:
“The ECB surprised everyone with a hawkish move by raising policy rates by 50 basis points; immediately after the announcement, the euro rose 0.53% against the US dollar. Such a decision was not expected on the eve of the eve, given the political turbulence in Italy, the widening of the spreads of core bonds compared to peripheral ones and the decline in corporate sentiment across the Eurozone, especially in Germany. With this aggressive move, the central bank appears to have almost wanted to seize the last opportunity to raise interest rates before the region falls into recession in the fall. Across Europe, sustained inflation is starting to create political instability, as we are seeing in Italy. It is a very complex moment for the ECB, which obviously does everything to fight inflation and keep market expectations on it under control, even at the risk of triggering a recession ”.