The fist does not end here –

The fist does not end here –

Yesterday, the European Central Bank raised interest rates for the seventh time in a row, from levels below zero until the end of last July. The rate of increases slowed by 0.25%, bringing the rate of increase on deposits to 3.25% and the key rate at which banks obtain financing from the European Central Bank at 3.75%. But Christine Lagarde has made it clear that the pressure does not end there and will take different forms. First, the President’s words made it clear that the majority is on the table Frankfurt Executive Council Plans to raise interest rates again in June and likely in July as well. “We’re on our way and we’re not stopping, we know we still have ground to cover. We’ll make decisions at the right time to achieve our goals,” said Lagarde, stressing that she spoke in the plural.

Deposit rate of 4%

So the debate going on today within the ECB is not about the hypothesis of stopping monetary tightening, but about bringing the deposit rate to its point at 4% or just below, and the main lending rate at 4.5% or just below. This will probably only be better understood between July and September, provided that the eurozone does not first enter a cloud of financial turmoil similar to the one that continues to affect a series of small US banks: immediately after the First Republic bailout in recent days, with the purchase Last minute by Jp Morgan, Pacific Western Bank yesterday lost more than 40% on Wall Street and is looking for a buyer.

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Dedicated liquidity from the European Central Bank

But, precisely, financial stability risks today are not at the heart of the ECB’s dashboard. For most of its headline numbers right now, the only thing is to raise interest rates and – added Lagarde – “to keep them at sufficiently restrictive levels to bring inflation immediately to the medium-term target of 2%”. Should tensions arise in banks or elsewhere in the markets, such as the United States, the European Central Bank is currently considering being able to manage the situation by offering dedicated liquidity. without relieving the general pressure on the economy. “Whatever happens – Lagarde said yesterday – we have shown that we know how to be creative. There are liquidity windows available.”

Possible stages of instability

Confidence in the central bank to be able to manage possible phases of instability is that tightening took another form yesterday: it is very likely now, from July, The ECB will completely stop buying back bonds purchased at maturity for €3,200 billion through Mario Draghi’s “quantitative easing” between 2015 and 2019.. Lagarde made it clear, and this naturally also applies to Italian government bonds. Until June, the Central Bank will therefore continue to reduce its balance sheet by fifteen billion per month, but from July the contraction will increase to 25 and from next year to thirty. This choice will also help reduce inflation, but it will force the Italian treasury to find more investors in the markets.

High cost of living

After underestimating rising inflation a year ago, many of the people at the ECB’s summit no longer want to risk tainting their reputation as price custodians (who are now riding 7% in the eurozone). Even if the economy continues to give mixed signals: were it not for the tourism boom that has Italy, Spain, Portugal and Greece running faster than average, the eurozone would probably have officially entered a eurozone recession. The first months of 2023 It is no coincidence that yesterday Lagarde spoke about the high cost of living, in particular in services. But the uncertainty of the picture helped to reduce yields on almost all European sovereign bonds (except for those of Italy) and caused the euro to fall slightly against the dollar.

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