By Andrea Hargraves 
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‘We never pre-commit’. Gone are the days when the European Central Bank, in the voice of former President Jean-Claude Trichet (2003-2011), did not commit to any decision that could (or could not) take several weeks or months after that. Taking the change of style brought about by Mario Draghi even further, led by the European Central Bank Christine Lagarde This Wednesday announced that It is not changing interest rates at the moment but will raise them next month and again in September – And at that time, it could be a double: it is enough that inflation continues without showing signs of improvement. However, by shooting inflation, Lagarde couldn’t avoid waking up another “ghost”: The “ghost” of the public debt interest in southern European countries.
By the end of September, interest rates will not only have exited the negative “terrain” but may, in fact, have become above zero. This has become the central scenario for monetary policy, based on what was announced by the European Central Bank on Thursday. And the It’s heresyIf, before this Governing Council meeting, analysts are divided over whether the ECB will raise interest rates by 25 basis points in July and another 25 basis points in September or, alternatively, 50 basis points all at once, in July, the The scenario has now changed to 25 basis points in July and another 50 basis points (half a percentage point) in September.
It is not even necessary for inflation expectations to worsen for this (Cumulative) Increase of 75 basis points in three months Confirmed – enough that it does not improve, the European Central Bank noted. And no one knows if it will improve, but the interest rate futures markets quickly started assuming not only those 75 points through September, but also a lot more in the last three months of the year. In other words, with interest rates on Thursday remaining at the negative -0.5%, the expectation has become that The Eurozone will end 2022 at benchmark rates of around 1% – with a tendency to continue rising next year.
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From Amsterdam (and not from Frankfurt, as usual), Christine Lagarde explained that the previously announced interest rate increases, “It’s not a step, it’s part of a journey“To combat the rate of inflation that will continue”undesirably highWhich is expected to end the year with an average (annual) close to 7%, more than three times the target set in the central bank’s mandate. Even after September, the trend will continue with “gradual and sustained” increases in interest ratesleaving definitively behind the long period of low (and even negative) interest rates that characterized the past decade.
But interest rates do not rise just because there is inflation and it is necessary to “normalize” monetary policy, after a long period with very low interest rates: the European Central Bank has also tried to convey the message that the economy needs higher interest rates. Why? It has a good basis for growth in the “medium term” – and only the war in Ukraine prevents this process.
This note of optimism does not appear to be in line with the ECB’s “significant revision” regarding the growth outlook for the Eurozone: Projected growth for 2022 decreased from 3.7% to 2.8% In 2023, it decreased from 2.8% to 2.1%. However, this ‘Lost’ growth will partially recover in 2024estimates the European Central Bank, which has improved its growth forecast for this year from 1.6% to 2.1%.
The European Central Bank said that “the unjustified Russian aggression against Ukraine continues to punish the economy in Europe and beyond,” adding that it “disrupted international trade, [a guerra]leads to a shortage of materials and contributes to higher energy and raw materials prices.” However, in that optimism note, the European Central Bank says that “ Conditions that allow economies to continue to grow, while benefiting from a reopening of the economy, a strong labor market, budget support, and the savings accumulated during the pandemic.”.
The euro failed to sustain its first positive reaction to the European Central Bank’s decisions and ended up falling again against the dollar, which does not bode well for how inflation continues to develop. Source: TradingEconomics
In terms of inflation, economists are beginning to forecast a 6.8% price hike in the eurozone in 2022, then lower the annual inflation rate to 3.5% in 2023. And only in 2024, inflation is expected closer to the ECB’s medium-term target: 2.1 % (target 2%). “Moderation in energy costs, improvements in global supply chains, and normalization of monetary policy are factors that are expected to lower the rate of inflation,” says the European Central Bank.
“High inflation is a big challenge for all of us“, in fact, the first sentence of the ECB statement. It then ensures that “the Governing Council will ensure that inflation returns to the 2% target in the medium term.”
The rapid rise in prices, while challenging, is not the only enemy that the ECB will have to fight in the coming months. As Lagarde spoke in Amsterdam on Thursday, interest rates in countries in the south of the eurozone – such as Portugal and Italy – have accelerated their climb in recent weeks. Portugal’s 10-year interest rates jumped 15 basis points to 2.66%.While in Italy rates rose 22 points to 3.69% – taking into account Italian debt risk spread against Germany to 220 basis points (maximum since May 2020).
This was as a result of the ECB not providing any more realistic details about what kind of tools could be used to avoid excessive expansion of financing costs for these countries. And about two hours after the press conference ended, it became known that A The “conservative majority” did not want to announce any definitive answer to this problem. It wasn’t Lagarde who said it, but the usual anonymous “sources” at the European Central Bank who usually speak with the major international financial agencies shortly after the president’s press conference (in what often appears to be a “settlement of accounts” with the official letter revealed by the president before few hours).
However, even preventing this “majority” from saying anything more realistic, Lagarde confirmed it The central bank “will not tolerate” Excessive “fragmentation” in the eurozone. He only added that the European Central Bank is “vigilant” of this movement and that it will act.”if necessary“to ensure that there is no such ‘fragmentation’ of monetary policy, i.e. that the policies set in Frankfurt produce similar effects in all jurisdictions. However, such a healthy ‘transition’ would be in jeopardy if, as in the sovereign debt crisis, countries had Very different interest rates.
With risks varying between Italy and Germany at more than 200 basis points (2 percentage points), for example, there are clear indications that speculation is forming in the financial markets that interest rates in the so-called peripheral countries may expand to problematic. levels. “Fragmented financial markets will be a drag” on monetary policy, Lagarde said, ensuring that even after new debt purchases are announced to expire on July 1, there is “flexibility” in applying existing instruments or designing new ones. “We have already shown in the past that we can do this and will do so if the need arises.He shot the president of the European Central Bank.
Debt interest rates from countries like Italy (in blue) and Portugal (in green) have accelerated the rise in recent months, widening the gap for Germany, whose 10-year interest rates are also up but below 1.5%. Source: Trade Economics
The message was vague and clearly legible from the cheat sheet. But, although Lagarde tried to assert firmness in the way she ensured that the ECB could intervene in the public debt markets again, “if necessary,” investors were not impressed. The European Central Bank failed to provide more details about its security plans [para este problema crescente] This means that debt risk premiums from countries Ocean will continue to expand.”Andrew Kenningham, chief economist for Europe at Capital Economics.
For Portugal, this will mean that future debt issues will remain increasingly expensive, at a time when less new debt is being paid off than old debt, which has matured over the past few years. This was the ground that gave the grapes: the ECB’s market purchases, which expire at the end of the month, have been made by Finance in the past 10 years. Halve the average cost of total public debt to 2%.. But with higher interest rates in the financial markets, only by resorting to shorter terms will the state be able to finance itself at less than this average.
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