November 29, 2022

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ECB: Recession Less Terrible, Keep the Pressure On

The eurozone is heading towards recession, but it will not be the “bloodbath” that could have been imagined in September with gas prices over 200 euros. Thus the ECB does not stop monetary tightening, even if on the basis the Fed may slow the pace of rate hikes as early as December. Less than a month after the December 15 meeting, Frankfurt started summing up the data of the past few weeks, such as the November PMI or Germany’s IFO confidence index, which are better than expected. Despite some predictions about a “black” 2023 with a global recession, “the expectations of the European Central Bank and the European Union are going in the same direction, towards lower growth in the European economy and higher inflation,” explains ECB Vice President Luis de Guindos. in Milan. The reports of the European Central Bank meeting at the end of October described the situation as follows: after stagnation in the third quarter, in the next two quarters, the 19th century economy “is heading towards a technical recession. But chief economist Philip Lane explained” a completely different scenario than that of a prolonged period of negative growth And the opposite scenario (with energy price spikes and rationing) described in the ECB’s “Personnel Outlook” in September.

What the ECB will decide in December is perhaps well summed up in the Irish governor’s words: “rates must go up,” and it’s too early to say how much, “I won’t rule anything out.” De Guindos expected inflation to start slowing “in the first half of next year” and “we may be very close to peaking”. Words that would rule out the possibility that the ECB wants to do the same next month, after their maximum increases of three-quarters of a point in both September and October. After all, the Fed is proposing a slowdown amid the difficulties the US economy is facing. The minutes of the October 26-27 meeting already made it clear how “many members” would have liked to cautiously raise the benchmark rate by half a point. The “doves” front, with a new attitude, has been awakened, in recent weeks, by governors such as Ignazio Fiesco of the Bank of Italy or CEO Fabio Panetta. But the last word was not said. Isabelle Schnabel, also a member of the ECB’s executive committee and not a ‘hawk’ like Dutch Klaas Knot who is asking to bring the (still huge) cost of money into a restricted area, says room for maneuver to slow monetary tightening is “still limited”. . Certainly “we’ll have to raise more”, that’s the logic too given that the ECB’s deposit rate still has a way to go, still at 1.50% vs the Fed’s 3.75-4%. It is likely that the settlement in December will slow down the pressure to half a point. But it is a compromise that could fall victim to quantitative easing: already in December “there will be a discussion”, explained Guindos, after pressure from “hawks” he predicted the scheduling of the operation by which the European Central Bank would begin to obtain the disposal of hundreds of billions of bonds bought on Years passed.

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