“The inflation outlook continues to be too high for too long,” the ECB said Thursday, in the very first sentence of the new policy statement.
Consistent with market expectations, Christine Lagarde delivered a 25bps rate hike, a step down from the half-point cadence the bank favored for most of a tightening cycle that’ll be a year old in July.
As a reminder, the ECB did resort to 75bps intervals on two occasions last year in its rush to make up ground. Thursday’s 25bps increment was the smallest of the cycle.
The depo rate is still miles below headline CPI, which unexpectedly ticked higher in April.
Notwithstanding April’s uptick, the ECB emphasized that headline inflation “has declined over recent months,” but cautioned that “underlying price pressures remain strong.” Recall that core inflation in Europe is still loitering near record highs, and concerns about the impact on wage-setting dynamics have grown.
The statement also alluded to the results of the Q1 Bank Lending Survey, which showed credit conditions remained tight and loan demand plunged amid higher rates. “At the same time, the past rate increases are being transmitted forcefully to euro area financing and monetary conditions,” the ECB remarked. Broad money growth in Europe was the slowest since 2014 in March.
The forward guidance was cleverly ambiguous. “The Governing Council’s future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary,” the ECB said.
That’s amusingly coy, although it plainly hints at additional hikes. The ECB isn’t at terminal yet, but vexingly, it’s possible that more rate increases could appear misguided with hindsight. The lending survey results plainly suggested the monetary policy transmission channel is functioning, but as the bank noted, it’s impossible to know how long it’ll take for its efforts to manifest in better core inflation outcomes.
“At current levels and given the lagged impact of monetary policy tightening both in the eurozone and the US, the risk is high that every single additional rate hike from here could turn out to be a policy mistake further down the road,” ING’s Carsten Brzeski wrote.
The ECB has been letting its APP portfolio (which is separate from the stock of assets it bought under the pandemic QE program) run off at a controlled pace, and reinvestments will cease altogether from July. PEPP reinvestments will continue until “at least” the end of 2024. As a reminder, the PEPP reinvestments can serve as a back up tool for managing fragmentation risk — they’re off-label for tamping down unruly spreads, where “off-label” means critics have never been convinced that preserving the integrity of the monetary policy transmission channel is everywhere and always synonymous with suppressing price discovery in periphery bonds. The ECB also has the Transmission Protection Instrument, an anti-fragmentation tool developed and announced last year.
“There are still significant upside risks to the inflation outlook,” Lagarde said Thursday, during her press conference in Frankfurt. “Russia’s war against Ukraine could again push up the costs of energy and food, a lasting rise in inflation expectations or higher-than-anticipated increases in wages or profit margins, could drive inflation higher, including over the medium-term.”
Her mention of profit margins (multiple times) was notable. The ECB recently flagged “Greedflation” in a research paper, although they didn’t use that term.
As for when the ECB will be satisfied that policy is “sufficiently restrictive,” Lagarde said officials will know it when they see it.
I’m not a fan of the “Greedflation” term, but I think every mention of the wage-price spiral, our traditional inflation boogeyman, needs to be matched by mentioning the “profit-price spiral,” where prices are raised, employment and investment are cut, and buybacks/M&A are increased, leaving EPS (and its primary dependents – stock prices and executive pay packages) safely on their now longstanding glide paths.
Yup.
One of the most obnoxious attitudes in our currently (acceptable?) form of capitalism is the value of productivity. Originally, the idea of productivity was that the economy would be better off if the same number of workers, working the same number of hours this year, compared to last year, would produce more output. The seers believe that this higher output will cause all consumers to somehow benefit. In fact, it seems clear to me that the main beneficiaries of higher productivity are the top managers and stockholders of companies that will enjoy higher profits from more goods produced by a shrinking workforce forced to work harder and longer. Cutting costs by reducing labor is relatively easy to accomplish and, in the short-run, at least, will make the rich, richer.
A monetary metric that measures productivity, compares labor costs to output, as opposed to the old hours worked measure. In this version of the idea, anything that lowers the cost of labor such as outsourcing, substituting capital for labor, or the restructuring of jobs that allows the hiring of less skilled, cheaper labor, will result in a rise in productivity. AI is in the process of being a big facilitator here … “thinking” machines taking the place of workers. Again, who does this help? Primarily, companies that will see profits rise. It doesn’t help the total workforce and might easily result in a decline in the effective income of consumers.
But Lucky One, with interest rates so much higher, Company management NEEDS to find other ways to fund share buybacks.
@derek, we don’t say “share buybacks”, we say “returning cash to owners”.
That language irritates me. When a company buys back shares, it isn’t genuinely returning cash to shareholders, because 1) selling shareholders have to give up shares of equal value to cash received, and 2) holding shareholders get no cash but own a company with fewer assets. Dividends, on the other hand, are genuine return of cash to shareholders.
I think we’re talking about the real owners, not random people that have a few shares.
No argument from me, sir. A complicating factor is the net versus gross buyback numbers. Which in many cases means how many shares are being bought out of the market to offset share-based compensation, like vested stock and options
I’m not sure how to assess the impact on the owners of the company, us dumb shareholders. Employees need to be paid one way or another. Dunno. What do you think?