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The possibility of the interest rates rise in the eurozone later this yearafter the ECB once again surprised everyone and everything with the announcement, made this Thursday, that the time when the monetary authority will stop making new debt purchases will come sooner than expected in the financial markets – purchases that have been decisive in recent years in keeping the financing costs of countries like Portugal at historically low levels. Rumors that, due to the war, the ECB would postpone plans to withdraw these monetary stimulus measures were clearly exaggerated. And all because Putin’s war is scary, yes, but the the fear of uncontrolled inflation is even greater.
At a press conference during which he posted a pin support for Ukraine, the President of the European Central Bank (ECB) proposed an unusually sad face. Because? For some, the so-called “financial Twitter” was just a way to show solidarity with the victims of war, but for others it was more than that: Christine Lagarde had the difficult task of communicating monetary policy decisions to millions of people. .. with which, perhaps, you do not entirely agree.
As chairman of the Governing Council, which brings together the sensitivities of all eurozone countries, Lagarde admitted that he had been intense debate this Thursday at the top of the monetary authority. In this debate “contaminated” (Lagarde’s expression) by the issue of the war in Ukraine, certain leaders have warned against the danger of the conflict and against the possible futility (even counter-productivity) of taking immediate measures to accelerate the normalization of the monetary policy conflict. Others forced the ECB to act, at a time when the interest rate inflation is very close to 6%, i.e. triple the 2% that the ECB must guarantee – it’s your only mandate.
In the end, it was confirmed that the public debt buyback program launched during the emergence of the pandemic (known by the acronym PEPP) will end at the end of this month of March. But then came the surprise: the another bond market intervention program, APP, will end early than what was indicated. On interest rates, the ECB has stopped promising that this will happen “soon after” the end of the debt purchases and has now started to say that between one thing and the other – that is, – say the end of purchases and the rise in interest rates – “Some time” will pass.
In the event of intervention on the debt markets, the guarantee given in the ECB press release is that 40 billion will be purchased in April, 30 billion in May and 20 billion in June under this APP program. Then the central bank does not exclude that the program may be extended (until the third trimester at the most) but does not undertake to with dates or values – it will be decided at the time, depending on the data collected on the evolution of the economy and inflation.
What is the difference? Previously, it was expected that the program could last until the end of this year 2022will now last until June and maybe a few more months – maybe. Some analysts had even admitted in recent weeks that due to the war in Ukraine, intervention in the debt markets could extend until 2023. In fact, it was decided quite the opposite..
This surprise immediately pushed up interest rates on public debt in countries such as Italy (+23 basis points to 1.9% at 10 years) and Portugal (whose rates jumped by 15 basis points). at 1.13%, in the same maturity which, at the end of 2021, had interest of less than 0.5%). Basically, what the ECB has announced is that the time when the central bank will cease to have the crucial presence that it has had in recent years in European debt markets will come sooner than expected – and this moment “is a little scary”as the president of the agency that manages the Portuguese public debt admitted in a recent interview with the Observer.
“It was the surprise of the year, in monetary policy“, commented Steen Jakobsen, investment director from Saxo Bank, in a brief reaction to ECB decisions. After several central bank officials in recent weeks hinted that the war in Ukraine would make the ECB think twice about moving forward with plans to normalize monetary policy in the near future, the authority finally decided to accelerate the end of market intervention. .
“It’s a decision super warmongeradded the expert, referring to the phrase normally used in central bank slang, in layman’s terms, to mean a faster tightening of monetary conditions.
Despite all the efforts made by Lagarde during the press conference to play down some of the decisions that appeared in the press release published shortly before, the prevailing opinion among analysts is that the strength of hawks (“hawks”) at the top of the central bank appears to be bigger than some expected. And this puts back on the table the possibility of an increase in interest rates in the coming months, which will affect Euribor rates.
London-based consultancy Capital Economics made a similar analysis: “The ECB is signaling that it is far more concerned about the continued rapid rise in inflation than about any adverse shocks to economic growth that may arise from the war. in Ukraine “. And Berenberg Bank took the same argument even further: “Faced with a record rise in inflation and a high level of uncertainty resulting from Putin’s war, the ECB opened the door, at least a little, to the possibility of the first interest rate hike will take place in 2022“.
This is exactly what was expected on the interest rate derivatives markets: a few seconds after the announcement of the ECB’s decisions, these markets were again anticipating a first movement in interest rates in September 2022. This was already the expectation of investors after the last meeting of the monetary authority, at the beginning of February, but the war in Ukraine (which started later) had changed this scenario.
But not all experts are convinced. Anna Stupnytska, global economist at Fidelity International, argued in an analytical note that a lot of water will still flow under the bridge. “We believe that the economic shock [causado pela guerra] becomes increasingly evident in the economic data, over the next few weeks the ECB should once again put inflation risks in the background and refocus on the importance of limiting turbulence in economies and markets,” says the economist.
In this order of reasoning, Fidelity maintains the conviction that “there will be no interest rate hikes by the ECB this year”, despite the fact that the market indicators already mentioned quickly reflected that this will happen, as soon as the decisions of this Thursday are made public. In fact, says Anna Stupnytska, “we believe that even there is a risk that there will be even more ECB interventions in the debt markets, especially if there are disruptions in the energy supply in Europe in the near future”.
For now, although the new macroeconomic forecasts prepared by the Staff from the ECB do not bring good news, the central bank still does not anticipate that the war in Ukraine could derail the recovery.
ECB economists have started forecasting growth of 3.7% of gross domestic product (GDP) in 2022, well below the 4.2% expected in December. But existing indicators continue to point to a “robust” recovery in the economy, said Lagarde, who recalled that the pandemic had an increasingly weak (negative) impact.
For 2023, the forecast has also been revised downwards: 2.8% (vs 2.9% expected in December). Compared to 2024, the same 1.6%. Corn the “risks” of the economy “turn to the downside”that is, they are more likely to surprise on the downside than on the upside, the ECB acknowledged.
Regarding the inflation, as expected, the forecasts were revised upwards – and that was not little. In 2022, inflation will average 5.1%, anticipates the ECB, two and a half times the medium-term objective of the central bank. The previous forecast was 3.2%.
“War represents a substantial upside risk to inflation,” admitted the central bank president, acknowledging that it is no longer just energy that is driving the price hike as the factors are now “more widespread”. Even so, the ECB remains convinced that by 2023, inflation will already fall to a more acceptable level of 2.1% – even so, more than the 1.8% previously forecast.
What if those predictions fail, as they have so far? In a sentence that recalled what Mario Draghi had promised, to preserve the monetary union, Christine Lagarde guaranteed that the “The ECB will do everything in its power to protect prices“.