ECB Poised To Banksplain – Again – With First Rate Hike Set For July
A blog entry by ECB President Christine Lagarde has plotted the course for monetary policy.

- Experts see little chance of rate changes

- Lagarde signals July, September hikes

- Chief Econ Lane underlines 25bp steps

- Record inflation has analysts wondering if hike due this week

- New econ projections likely to paint bleak picture

- Rate decision due Thursday at 11:45 GMT / 13:15 CEDT

- Lagarde presser set for Thursday at 12:30 GMT / 14:20 CEDT

 

By Eric Culp

European Editor, LiveSquawk News

@EricCulpLS

 

3 June 2022 | 16:40 GMT

 

FRANKFURT – Will they or won’t they? The question is not whether the European Central Bank will raise interest rates for the first time since 2011, it’s if they’ll do it Thursday. The consensus says policymakers are on hold until July, but in this crazy environment, who can be sure?

 

Now that ECB President Christine Lagarde is a sporadic blogger, she has another outlet for announcing the strategy of her fellow rate-setters. In a 23 May post, Europe’s monetary policy suprema wrote: “I expect net purchases under the APP (Asset Purchase Programme) to end very early in the third quarter. This would allow us a rate lift-off at our meeting in July, in line with our forward guidance. Based on the current outlook, we are likely to be in a position to exit negative interest rates by the end of the third quarter.”

 

BNP Paribas said it considers her missive a road map. “In what we perceived to be an attempt to regain control of the narrative on policy normalisation (against a backdrop of increasingly open and hawkishly centred discussion on the Governing Council), Lagarde has effectively pre-announced the ECB’s next steps.”

 

The French analysts and other central bank mavens says they view the blog entry as a signal for rate increases in both July and September in the form of like hikes of 25 basis points to drag the -0.50% deposit rate out of negative territory. The hawkish tilt is also set to add to the 0.0% refinancing rate and the 0.25% marginal rate.

 

ECB Chief Economist Philip Lane provided support for a quarter-point pace for hikes in an interview with a Spanish newspaper, a translation of which was published on the central bank’s website: “Normalisation has a natural focus on moving in units of 25 basis points, so increases of 25 basis points in the July and September meetings are a benchmark pace. Any discussion about other moves would have to make the case for moving more strongly than this sequence of hikes in July and September.”

 

Like the inverse of a car mirror, here objects may appear smaller than they actually are.

Great time to be alive, for inflation fans

Lagarde’s post came about a week before the latest inflation report for the Eurozone, which was released the day after Lane’s interview was published. The May numbers didn’t disappoint adherents of schadenfreude: preliminary data showed headline consumer price growth at a record 8.1%, which handily beat the market forecast of 7.7% and the previous all-time high of 7.4% set in March and repeated in April.

 

In other words, the situation has further deteriorated – and then some – especially since the central bank’s prime directive is price stability with an annual inflation target of 2% over the medium term. Additionally, on the same day the single currency area set another in a recent slew of records for consumer price growth, Brent crude traded above EUR 124/bbl after the EU announced plans to stop imports of up to 90% of Russian oil by year’s end. This move and the resulting surge in oil prices has observers warning of an extended period of high energy costs, so continued strong inflation.

 

European households must now navigate increasingly dire economic straits as exorbitant prices further sap their dwindling purchasing power, but even inflation above 8% in the single currency area and double-digit price growth in one-third of the nineteen euro countries is unlikely to coax the ECB into bringing forward its hikes. By the way, consumer price growth was over 20% in Estonia last month.

 

Well, at least the ECB staff has a chance to adjust its growth and inflation estimates, which have been about as right as the odds on this year’s winner of the Kentucky Derby, which went off at 65-1. New forecasts are due Thursday with the rate decision and policy guidance, and the outlook will likely be even grimmer, according to Nomura. “We expect substantial downward revisions to the ECB’s quarterly economic growth forecasts and would not be surprised to see a slightly above-target inflation forecast at the end of the projection period (December 2024).”

 

Casting a pall over it all is a spectre omnipresent in times like these: stagflation. While no one has “officially” called it – who can? – this economic anathema of weak business activity and high consumer price growth could already be considered the correct diagnosis for the world’s largest trading bloc, and possibly other swaths of the global economy. ING says France is currently in recession after last quarter’s GDP growth was revised down to a contraction and commerce continues to tank.

 

To wit, higher interest rates rarely promote economic growth.

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