ECB towards a second hike of 25 basis points

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Too early to stop. Analysts expect the European Central Bank to further increase the official cost of credit, by 25 basis points, at its June meeting, bringing the key rate to 4% – a historically low level – still leaving a free hand for the future. Two more hikes, in July and September, are not improbable at all. The ECB itself indicates in its bulletin that the market measures of one-year inflation expectations point to 2.2%: real rates in the short-term part of the curve are therefore close to 1.8% but consumer expectations point higher, to 2.9% for 2026.

Yield curve still rising

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In Euroland, too, markets underestimated the central bank’s determination to fight inflation – they figured the rally could stop soon and still think the cuts will come relatively quickly – while monetary policy is facing diverging risks. Financial conditions in Euroland have responded relatively well to the hikes. Yields continue to rise, while the reversal of medium maturities could be an indication of expectations of a slowdown in the economy or, even, of a coming, and almost certainly premature, slowdown. rate cuts.

Euro down again

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The euro – which weighs much less on financial conditions – has actually begun to lose ground again and has moved away from the long-term average which is a “naive” indicator of the equilibrium value: further proof of how the exchange rate cannot be a target of monetary policy, subject as it is to many other factors, such as the choices of other jurisdictions.

The rapid rise in the cost of credit

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The cost of credit has risen rapidly, although it remains far from the historical highs of Euroland, in the face of record inflation. In Germany, not surprisingly in a technical recession, it was at its highest – compared to other large countries – for several months (in the past the record was Italian), but the rates in our country, which in 2022 were lower than those of other economies , have risen very rapidly and are now at German levels.

Fixed loans after the downturn

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Loans to financial companies – in the ECB’s non-seasonally adjusted data – therefore remain substantially stable (the numbers are updated to April) after the decline in December, but at the moment they continue to show decidedly high annual growth rates. Only after August will the new trend be clearer.

The acceleration of negotiated wages

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Monetary policy is therefore affecting credit and, in this way, investments, which felt the blow in the last quarter of 2022 (-0.8% quarterly), then remaining stable in the first of 2023 (+0.1% ). However, what worries the ECB, as well as other central banks, is the trend in wages and, at the same time, profit margins. Negotiated wages are accelerating markedly and rose by 4.3% annually in the first quarter, much more than inflation and productivity. As is often the case, some research by the ECB has shown in recent years, the inflation deriving from energy prices causes a sort of “competition” between companies and workers, who try to make up for lost ground by unloading their game on prices. It is no coincidence that the ECB has long been “asking” for a moderation, above all of profits (more flexible than wages and therefore more able to recover in the future). The risk of a price-wage-profit-price spiral is therefore real and worries the ECB.

The political game between hawks and doves

To complicate things, there is the confrontation between “hawks” and “doves” which – as always – focuses on the issue of fiscal policy and the incentives and disincentives that monetary policy can send to governments. Especially in recent months, when the stability pact is still suspended. It’s a complex issue: higher rates can both prompt governments to stop and accelerate public spending to support demand, with the risk of generating future primary deficits and thereby prolonging the agony of high inflation.

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