They pre-committed. So, they followed through.
Consistent with the forward guidance that accompanied the February policy decision, the ECB went ahead with a half-point rate hike on Thursday. Prior the decision, market participants wondered if the Governing Council might balk in the face of recent banking sector turmoil, including and especially Credit Suisse’s worst day ever.
Instead, the GC forged ahead, citing inflation, which the new statement said is “projected to remain too high for too long.” That’s not what you want to hear from an inflation-targeting central bank, but I suppose they get points for candor.
Thursday’s move brought the total delivered tightening to 350bps out of negative territory. As a reminder: They got a late start, and not just because they were behind the curve on inflation. The bank’s convoluted forward guidance on asset purchases effectively held Christine Lagarde back.
Naturally, the ECB acknowledged recent events. “The Governing Council is monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area,” the statement said, adding that the banking sector is “resilient, with strong capital and liquidity positions.” If necessary, the ECB can “provide liquidity support.”
Reports indicated the GC considered releasing a short statement Wednesday to help calm frayed nerves around Credit Suisse. In all likelihood, the statement language Thursday reflected what the ECB would’ve said had they elected to comment publicly. The SNB ultimately delivered reassurances and Credit Suisse said it would tap $54 billion in liquidity from the Swiss central bank.
The new staff projections from the ECB reflected the statement’s upfront warning on inflation, although the baseline path for headline CPI was revised lower, “mainly owing to a smaller contribution from energy prices than previously expected.”
Core inflation, on the other hand, is seen averaging 4.6% this year, higher than the December projection. Core price growth should recede in 2024 and 2025 “as the upward pressures from past supply shocks and the reopening of the economy fade out and as tighter monetary policy increasingly dampens demand.”
Europe skirted recession this winter, no small feat under the circumstances, but the downside was an apparent migration of price pressures to wage-setting and services. That’s what the GC is concerned about.
Of course, recent events mean the staff projections (which, forgive me, are a bit of a standing joke in market circles anyway) are even more indeterminate than usual, something the GC readily acknowledged. “The new ECB staff macroeconomic projections were finalized in early March before the recent emergence of financial market tensions,” the statement said. “As such, these tensions imply additional uncertainty around the baseline assessments of inflation and growth.”
Don’t forget: QT is now running. Sort of. The APP portfolio will shrink by €15 billion per month through passive rolloff. And yet, proceeds from principal payments on assets purchased for the pandemic QE program will still be reinvested in full until “at least” the end of 2024.
Who knows how much longer Lagarde will hold the line in the inflation fight. The forward guidance was effectively scrubbed from the statement, which now just says future decisions will depend on the data. It goes without saying that the ECB will have to respond to any sort of financial sector meltdown.
Commenting on Thursday, ING’s global head of macro, Carsten Brzeski, wrote that, “What markets and central bankers are currently experiencing is actually what undergraduate students learn at college in their first year of studying economics: Monetary policy has an impact on the economy [so] it shouldn’t be a surprise to anyone that the most aggressive policy tightening since the start of the eurozone in 1999 has, and will, have adverse effects.”
There’s a Jean-Claude Trichet joke in all of this. I’m sure someone’s already made it.
FWIW, I’m hoping both LaGarde and Powell hold the line on inflation. My trips to the market for provisions and sundries are starting to resemble yet another installment in the Scream franchise.
Because rate hikes have worked so well so far, right?
Where might inflation be if rates were still 0 or below?
Who knows. What I do know is that everybody’s a genius when they don’t have to make any difficult decisions and have the luxury of criticizing people from the sidelines.
That’s my point. I was more hawkish than most readers here as of February 2022, and I’ve remained so since then.
But I think it’s important to acknowledge that almost without exception, we all claim we’d do a better job if only we were in charge, when in fact, the odds favor us screwing things up even worse if it were up to us. “Don’t punt! Go for it! It’s just a yard! How hard can it be?!”
wise comment. hindsight capital up 3000% in a few years. as much as i thought powell was the wrong choice for the job he has been through a very difficult 5 years + and done a decent if not spectacular job. while i may disagree with some of his and the fomc decisions they really have tried to thread a needle which is not easy
CPI is down to 6.0% from 9.1% in June, core to 5.5% from 6.6%, which seems like progress. Labor market is still strong, but any gains in wages are being lost to inflation. Would be a mistake, imo, for the Fed to throw in the towel now. And with the ECB having just raised .50, I’m willing to bet the FOMC will hike .25 at its next meeting.
We see the damage from raising rates a lot quickly. We don’t pay enough attention to the problem of
overstaying with suppressed rates and QE.
I was never a fan of the Taylor Rule, but as this latest installement in monetary madness as unfolded, I’ve begun to reconsider my position. Obviously too late to use as a guideline in our current mess — FOMC would have to get fed funds rate to 8%, in a hurry — but as the Fed slowly wrestles things back to some semblance of normal, I can’t see the harm in the Fed adopting it as a guideline. Savers, retail investors, and small to mid-size banks should always have an option other than the stock market that allows them to stay ahead of inflation.
Jim Bullard cited the Taylor “Rule” as justification for aggressively raising rates. What was curious about that was that Prof Taylor himself added a proviso that the rule may not apply in the face of a severe exogenous factor.
The thing is, the average inflation rate from Jan 2013 to Jan 2023 (quickly done with a spreadsheet and annual numbers) is about 2.6, including the last three high years. Not so far off the target for those years when we undershot so many. As long as this hot period cools down soon, it’s not such a bad decade, decade and a half, overall. Inflation-wise, that is.
Now do wage growth over that period.
Point well taken, but I only intended to say Hey, despite the hot run recently, we’re remarkably close to target inflation numbers for the longer run. The wage/wealth inequality sucks regardless. My own wages (in the non-profit sector) have been fairly stagnant since the late 90s.
With the Taylor Rule as a guideline, fed funds rate would’ve averaged 4.6% annually for the period. One could argue that that would’ve been healthier for the overall economy than the near-ZIRP rates with which we ended up.
(4.5) Trillion USD in Covid relief and all we got was this lousy 6% inflation rate! This isn’t “let them eat cake” and the benefits of the policy were of course not even, with outsized benefits to business owners. But the price increases seem pretty pedestrian for what we got out of the policy response.
Roughly, that’s $11,000 per capita (clearly not evenly distributed). That us about the same as what gain you’d see if you take a middling income of ~$60k and inflate it around 6% for 3 years or so. Not that THAT happened to anyone, just comparing numbers for fun.
What happens with a “middling income” of $36k for the bottom quarter of the country (that’s 82 mil people). Without those COVID payments we with food on our tables complain about, Woodie Guthrie would need to come back from the dead and write some new songs about the breadlines. My daughter and her husband just lost some nice tech jobs from mergers with firms seeking to reduce those ugly fixed costs. So they just fell from the top 10% to the bottom 10% in nothing flat.
I hear you, our household income is not far from that bottom quarter most years, and the COVID payments were quite welcome here, and across our mostly poor, rural county. That part was money well spent.