The process of accelerated rate hike of official interest initiated last July could be facing, if nothing goes wrong, its final stretch, although its dimension cannot yet be determined. The president of the European Central Bank (ECB), christine lagardehas assured this Thursday that his body has already carried out a “significant amount” of work necessary to return the CPI of the euro area to 2% in the medium term and that remains “a little way to go”. Instead, last March, at the press conference after the latest rate hike, he stated that there was still “much more ground to cover”.
The banking storm of a few weeks ago has once again brought to light the struggle between the two souls that coexist within the ECB: that of those who defend a flexible and broad interpretation of its mandate that takes more account of the economic situation (‘pigeons‘) versus those who advocate sticking to their objective of achieving price stability (‘hawks‘). It seems certain that the monetary authority of the euro vit will become more expensive the price of money in your may meetingbut there are more doubts about whether it will raise rates again both in the June as in July and to what extent.
Among the moderates is the Governor of the Bank of ItalyIgnazio Visco, who precisely this Thursday warned that “the risk of doing too much is at least similar to doing very little.” financial turmoilhas highlighted, “you can come back”hence the importance of “decide meeting by meeting on the basis of the data”. The governor of the Bank of Spain, Pablo Hernandez de Cos. On the other side, his counterpart from Bank of the NetherlandsKlaas Knot, has argued that it is “too soon to talk about a break” and has been in favor of raising rates in June and July.
Credit pending
lagardewhich plays a more intermediate role, did not want to specify how long or how far the rates could go up: “The path length will depend on a number of factors, in particular the credit impact of the financial problems that we saw”. This is a key factor. The financial turmoil they become more expensive and harden access to credit, which has a contractionary effect on inflation without the need to raise rates. “If the tensions continue or escalate, they could lead to a more pronounced tightening of credit conditions than expected and undermine trusta, also giving rise to a scenario of more moderate economic growth and a faster decline in inflation,” Hernández de Cos recently highlighted.
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The ECB, precisely, has published this Thursday the minutes of the last meeting of his governing council in March, in which he raised rates by the expected 0.5 points, to 3.5%, despite the banking storm. As he has revealed, “a very large majority” of directors they supported the rise proposed by chief economist, Philip Lane, to “for instill confidence and avoid creating further uncertainty in the financial markets”. However, “some members” of the council advocated do not raise rates and wait until the tensions in the financial markets subsided, while reminding “past episodes in which the governing council had raised interest rates and shortly after had to reverse climb“, in reference to the increase approved under the mandate of Jean-Claude Trichet at the dawn of the previous financial crisis.
Given these discrepancies, the directors agreed not to communicate what they plan to do in the following meetings, contrary to what had happened in the last ones. However, some expressed their “worry because the absence of such orientation could be interpreted as an indication that the cycle of rises was coming to an end“. For this reason, the minutes point out, it was proposed to convey the message that, had the recent turmoil in the markets not occurred, the ECB “would have expressed the expectation that it would further increase rates.”