However, according to the insider, the ECB is unlikely to abandon its plan to hike rates by half a percentage point at its March rates meeting. Giving up would damage their credibility, he said. The person added that although the ECB’s new inflation forecasts for the next two years are lower than the December projections. However, price growth in 2024 will still be well above the central bank’s target of two percent inflation. In 2025, inflation will be slightly higher. In addition, forecasts for core inflation, which exclude volatile energy and food prices, would be revised upwards. This would reinforce arguments by those central bankers who advocate tighter guidance, said the person familiar with the situation. An ECB spokesman declined to comment on the information.
Bini Smaghi advises ECB against 50 basis points
Lorenzo Bini Smaghi, Chairman of Société Générale and former Director of the European Central Bank (ECB), told the ECB of a rate hike discouraged by 50 basis points. In an interview with the Börsen-Zeitung, the Italian also called for banks to be better supplied with liquidity and for smaller institutions to be regulated more strictly.
“Holding on to the 50 basis point hike as if nothing happened means taking a tougher stance than previously thought,” Bini Smaghi told the paper. This could be risky and lead to further instability. “The faster markets stabilize, the sooner the ECB can return to its policy of lowering inflation,” he argued.
In his view, a shift of one month or just 25 basis points would not be a problem if it was explained well. “The ECB should avoid repeating the mistake of 2011 when it continued to raise rates without taking into account the mounting contagion from Greece’s debt restructuring.” That accelerated the crisis and led to a change in course after just a few months.
Bini Smaghi believes that reducing the ECB’s balance sheet is the right thing to do, but advocates mitigating the impact on banks. “TLTROs (targeted long-term tenders) are useful for banks’ asset-liability management in the transition phase, which can be a vulnerability, as the case of SVB (Silicon Valley Bank) shows,” he said.
The ECB should remember that it has tools to deal with liquidity problems, such as the TLTROs or even the good old LTROs, as well as the traditional refinancing lines. The SVB crisis also shows, he says, that it’s a mistake to treat smaller banks differently than larger ones because they are supposedly less risky. “This is also the case in Europe, as politicians are often the victims of local bank lobbying,” he said.
Frankfurt (Reuters) and FRANKFURT (Dow Jones)
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