Inflation has been increasing for two years, despite the pandemic restrictions and lockdowns which hurt the consumer and the global economy. A year ago US CPI (consume price index) inflation moved above 5% and instead of slowing down, it has been accelerating in recent months after the price surge since March. Central banks have pressed the panic button and have started increasing interest rates pretty fast.
The reserve bank of new Zealand (RBNZ) and Bank of England (BOE) have been on the forefront of hiking rates, both having hiked 5 times since they started doing so late last year, while the European Central Bank hasn’t started yet. Although they are planning to begin in July. But, from what we are seeing, these hikes are not having any impact on cooling off inflation whatsoever which has only been picking up pace in the last two months.
Instead, together with surging prices, these hikes are helping in hurting the consumer and eventually the economy. So, there have been some contradicting comments from the ECB, which should be very wary about hiking rates right now.
Remarks by ECB policymaker, Robert Holzmann
- A 50 bps rate hike in July would be appropriate
- A strict forward guidance no longer makes sense
- Ending the year with rates in positive territory is extremely important
Well, his view is certainly not what Villeroy depicted out yesterday. And from Lagarde’s demeanour earlier today, the base case remains for the ECB to move more gradually and stick with a 25 bps rate hike in July – at least for now.
Remarks by ECB policymaker, Francois Villeroy de Galhau
- A 50 bps rate hike isn’t part of the ECB consensus
- ECB is in the process of normalizing policy
- There is no tradeoff between growth and inflation
Even Lagarde seemed rather pensive about a 50 bps rate hike earlier, so it isn’t so much of a surprise really. The issue for the ECB in my view isn’t getting rates from -0.5% to 0% but rather lifting rates significantly in positive territory – more so if they want to talk up any chance of getting to the supposed neutral rate.
In any case, Villeroy did earlier in the day come out to say that rate hikes in July and September are “likely a done deal”. That alludes more to a 25 bps rate move in each meeting.
Remarks by ECB executive board member, Fabio Panetta
- The natural way forward would be to start raising rates
- The current short-term inflationary pressure may spill over to inflation expectations, leading to more protracted inflationary pressures
- If we were to see clear signs of a de-anchoring of medium-term inflation expectations, we would accelerate the pace of stimulus withdrawal
- We could go further and adopt a restrictive stance if necessary
- For now, we do not see this “ugly inflation” scenario materialising
- The natural way forward would be to start raising interest rates while keeping the stock of assets purchased under the APP and PEPP constant
- We currently intend to end net asset purchases in Q3
- Once net asset purchases have come to an end and the stock is being reinvested, rate policy will be clearly superior to balance sheet policy as the main tool
- Full remarks
A lot of this talk is conjecture at this point but you sort of get the message. The ECB is laying out the idea of how they want to go about things when delivering rate hikes but I would not expect it to be that straightforward.
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