Tuesday, May 24

ECB phlegm put to the test by new inflation record

Inflation in the eurozone, which hit a new record high in January, is increasing pressure on the European Central Bank and risks deepening divisions among governors who are holding their first meeting of the year on Thursday.

The ECB’s hopes of a gradual decline in inflation from January were dashed, with a surge of 5.1% which shattered the previous record of December (5.0%).

Published the day before a meeting of the 25 members of the Board of Governors, this figure reinforces the questions as to the moment that the institute will choose to initiate a monetary response.

The ECB has so far maintained a more wait-and-see attitude than other central banks, notably the Fed, with regard to inflation.

Except surprise, it will stick Thursday to the device stopped in December, consisting in gradually reducing its debt buybacks, according to observers.

The institute’s key rates are expected to stay at their historic lows and their increase will only occur after the end of net debt purchases.

This would immediately exclude a rise in rates during the year 2022, as the president of the institute, Christine Lagarde, has affirmed on several occasions.

– Council split –

In recent weeks, fears that the Omicron variant could permanently weigh down the economy have subsided and it is high inflation that is mobilizing spirits, with the risk of seeing prices soar further if tensions between Russia and Ukraine were to lead to war.

In this context, friction among the guardians of the euro, already perceptible in December, could increase between the “doves”, in favor of an expansive monetary policy and the “hawks”, in favor of a tighter course.

Nothing should be decided before the March meeting, which will provide new inflation forecasts for 2024.

Other central banks immediately embarked on monetary tightening, notably the American Federal Reserve (Fed), which should raise its rates in March, then several times throughout the year.

The ECB, whose inflation target is a maximum of 2% in the medium term, considers it preferable to wait, still convinced that prices will eventually decline.

It also considers its ability to act on overheating prices linked to the strong post-lockdown global economic recovery to be limited. This led to a supply shock characterized by increases in production costs, themselves linked to breaks in supply chains and, in some sectors, shortages of raw materials and components.

“Monetary policy cannot bring down the price of oil or gas,” said Isabel Schnabel, member of the ECB’s executive board, in December.

Decked out in Germany with the nickname “Madame Inflation”, which “impoverishes savers and retirees”, Christine Lagarde defends her course: “We cannot act immediately. If I raise interest rates, it will have a effect within 6 to 9 months. The time it takes to go down the financing chain. But we are slowing down growth,” she explained in mid-January.

– Second round effects –

The President of the ECB will have to choose her words on Thursday to both “confirm her firmer position on inflation” and keep “at bay any speculation on premature rate hikes”, according to Carsten Brzeski, economist at ING bank.

Because the Frankfurt institution remains very vigilant about what it calls “second-round effects”: if price tensions last longer than expected, they will fuel wage demands to compensate for losses in purchasing power. .

The price-wage spiral has not yet materialized in the euro zone. In the United States, wage increases, in a context of labor shortages, contributed to the record inflation of 2021 (7%).

January’s inflation record “seems to call into question the ECB’s commitment to leaving interest rates unchanged throughout 2022,” Elga Bartsch, chief economist at BlackRock Investment Institute, told AFP.

The markets are now seeing the ECB launch its first rate hike – by 10 basis points – by July, compared to September before, according to Bloomberg tables.


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