The European Central Bank (ECB) has finally joined most of the world’s issuing institutions in taking the plunge of raising interest rates to combat inflation, an economic threat forgotten over the past period. This is the first time in 11 years that this step has been taken in Frankfurt. And it did so vigorously, leaving the era of negative interest rates behind and raising them by 50 basis points (0.5 percentage points), a decision the agency made only twice. in its (short) history. The last in June 2000. At the same time, he pledged to create a mechanism of unlimited means to prevent these movements and the normalization of monetary policy from carrying over to risk premiums and causing financial fragmentation. of the euro area. The Board of Governors acknowledges that it was managing a bigger measure than announced last month when it unveiled its plans for this Thursday to raise the official prices of the currency by a quarter point, 0.25 points of percentage. As the ECB President herself implicitly admits, the reversal is due to the negative inflation surprise of last month.
“These are two important steps,” Lagarde announced after the board meeting. The ECB’s objective is “to ensure that inflation returns to 2% in the medium term”, explained the press release after the meeting. She wants to do it “in the medium term”, that is to say, in 2024, as the president herself said in her speech in Sintra (Portugal) last week. Discussing the mechanism for intervening in capital markets when the bond yield spread widens unnecessarily, he says: “It is necessary to fix the effective transmission of monetary policy.
“The ICS [siglas en inglés del Instrumento para la Protección de la Transmisión de la política monetaria] It will complement the Governing Council’s toolkit and can be activated to counter disorderly and unwarranted market dynamics that seriously threaten the transmission of monetary policy in the euro area. The scale of TPI purchases depends on the worsening of risks that affect the transmission of monetary policy,” reads the statement from the ECB on the most innovative courage adopted today. The same note recalls that this arrangement will be the definitive case since the first defense will be the “flexible” reinvestment of the government bonds that it now has in its portfolio, that is to say, to insure itself, to buy more debt sovereign of the most affected countries.
This mechanism, already effective, was unanimously approved by the 25 members of the Council, which Lagarde underlined each time she was asked about the new tool during the press conference after the meeting. The rise in rates did not arouse the same consensus. Basically, the TPI is designed to work without media limitations, but very time constrained. Its activation will also correspond to the governing body of the issuing institute, which decides by taking into account several criteria and serves as a beacon, but the establishment does not have to oppose it. One of them is that the country in question is not subject to the excessive indebtedness and macroeconomic imbalance procedures as determined by the European Commission, that it complies with the commitments and reforms established by the Recovery Fund of the EU, as well as the community recommendations established semi-annually, and in addition a dissection of the sustainability of the debt. To these instruments are added the numerical variables that Lagarde did not detail, nor the subsequent communications which will not be public. And finally, the qualitative and decisive criteria of the Board of Governors.
It took time to reach the unanimity underlined by the French banker. The first time the ECB discussed creating this platform to ensure the normalization of monetary policy was in December. On the other hand, the dissent was not only within the Board of Governors, it also created many tensions in the member states. More than once Federal Finance Minister Christian Lindner has urged the family not to lose their temper as adventure premiums rise. On the contrary, Spanish Vice President Nadia Calviño has said more than once that she is dealing with “good news”.
The Board of Governors meeting began Thursday at 8:30 a.m. A few minutes before, the worst decoration one could oppose was confirmed. At least less than its former president Mario Draghi, the magician who scared away the ghosts of the euro zone ten years ago with a single sentence (“whatever it takes…”), announced his resignation as Italian Prime Minister. The wide set was confirmed the day before. And the markets reacted accordingly: the Italian stock market fell and the adventure premium (the difference in yield that investors demand for a 10-year bond from a eurozone country compared to the German bond) jumped up again.
It was no longer a question of containing the rise in the CPI for a year and reversing the forecasts according to which it would continue to grow (Goldman Sachs delays exceeding 10% in the euro zone in September), while the euro zone fragmented is avoided by the end of sovereign debt net operation software, a great challenge in itself with a conflict on the contrary of the auction. Today, the situation is compounded by political instability in Italy, a country noble enough to threaten the stability of the single currency and a state liability that accounts for around 150% of its GDP, second only to Greece. .
To avoid this adventure, now aggravated by financial fragmentation, the rigging announced must allow the issuing entity to intervene on the markets while it recognizes that there is a large unjustified difference in the adventure premiums which increase in some countries the credit balance (see Germany) and expensive in others. As ING reminds us, it is not only Italy that is at risk of this, but also Spain, which is paying an amount equivalent to 2% of its GDP (around 25,000 million euros) in interest on its debt and which has one of the largest structural deficits in the Union. European. Union. And if there are perfectly differences on the imminent danger and its magnitude, the danger is there, as the ECB itself recognized during its extraordinary meeting in June, stressing that there is “an uneven transmission “. [entre los países de la eurozona] monetary normalization policy.
If this platform works, it will allow the ECB to focus on its binding mandate: to monitor price stability and bring the dominant CPI closer to a medium-long horizon of 2%. Their work would thus be more in line with that of global issuers who are not afraid that their decisions will financially fragment their regulatory space. It is still useful to understand why, according to the International Monetary Fund, 75% of central banks have already started to raise interest rates. Some at such a devilish pace that they have chilled economic activity to the point of recession: the US Federal Reserve has lifted the dollar by 75 basis points and is expected to do so soon; Canada’s Flock raised interest rates by 100 basis points (one percentage point) last week.
In its short history – it was founded in the 1990s – the Frankfurt organization has stood out for its great caution. Up to the anniversary, it had increased its key rates by more than 25 basis points only twice, in 1999 and 2000. There is no doubt that breaking with this conservative tradition to quickly return to this objective which, in some countries like Germany, almost untouchable, it was 2%, it’s going to trigger a big recession. There is therefore no lack of voices to be cautious now, even if it is at the cost of inflation remaining a few years above this level, which would help a lot to reduce the public debt (a complete disappointment in the oxygen for Greece, Italy, Portugal, Belgium or Spain). This Thursday, Lagarde left the door open for now for her to make another move of the same magnitude in September, when the council meets again. But that, as she herself said, “will depend on the data that will then be on the table.” “We will make decisions month by month depending on the conditions. Step by step”.