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Inflation continues to rise, and all eyes are on the ECB. Will it tighten its monetary policy? Last week Lagarde seemed to indicate this, but this week she changed her tune once more… what is she playing? Observers think the ECB president is panicking, others say she has no long-term vision and only reacts following the fact, so as not to upset either side.
Is the European Central Bank in panic? Usually, it is the word furthest from the qualifiers relating to it, the Central Bank being supposed to represent stability. But two leading observers think so, reports Archyde.com.
The announcement of a possible interest rate hike last week had an impact on the markets. It was somewhat surprising, as Lagarde always seemed strongly once morest raising rates, maintaining that inflation was only temporary. Investors took it at face value, and the main indexes subsequently suffered slight jolts.
“We go from patience to panic”
“There can only be one conclusion: the communication mission failed. We go from patience to panic, ”criticizes Carsten Brzeski, economist at ING. He thinks in particular of the former President of the ECB, the current Italian Prime Minister Mario Draghi: “If you compare this to the Draghi era, it is extremely difficult for the market to know who to listen to”.
Investors’ confidence in the ECB’s communication is a valuable element, in particular for managing market valuations.
Lagarde wants to keep a consensus between the various officials of the ECB. But she faces a minority who want to take a strong stance immediately, and scale back stimulus as early as Thursday’s meeting, sources tell Archyde.com.
“Lagarde panicked, and also adopted a tougher rhetoric, to avoid a return to the public disagreements of the Draghi era (especially in Germany),” analyzes UniCredit’s chief economic adviser Erik F. Nielsen. “If the institution is led by someone who oscillates between the two camps, it is difficult to give a coherent message. »
Rising interest rates?
According to analysts, one or more increases should take place in 2022, and the ECB should also end its bond buyback program. The ECB deposit rate is currently -0.5%, and money markets expect it to rise to 0 before December.
But before the European Parliament on Monday, Christine Lagarde took a step back, indicating that there were no signs that a “sustainable tightening” was necessary. For economist Paul Donovan of UBS Global Wealth Management, this is a step backwards that lacks expertise.
This lack of clear communication has its effects in the bond market. Greece and Italy in particular are seeing interest rates on ten-year bonds rise, while they need the ECB’s buybacks to keep a positive balance, to navigate well through the health crisis. They increased by 1.8 to 2.5% and 1.4 to 1.8% respectively, in the space of a few days. Risk premiums have also risen, unlike German bonds, reputed to be the safest and often taken as a benchmark for assessing the risks of others.
” Looking out the window “
A last and rare criticism is launched by Vitor Constancio, former vice-president of the ECB: “Central banks must be forward-looking and must therefore use models and projections, adding, of course, a share of judgement. But looking out the window, measuring the temperature, and deciding, is a very bad strategy for monetary policy.
He thus refers to the tougher speech chosen by Lagarde, following two consecutive months of high inflation rates. According to him, the ECB thus lacks a long-term vision and a spirit of apprehension.
