Because the markets do not believe the little words of Lagarde’s ECB

11 June 20222 years ago babelfish

Mario Draghi's “Whatever it takes” could only work in July 1992. Lagarde, even if she wanted to, can no longer use the same phrase and is forced to premise often “within the limits of our mandate”. That is, little or nothing. And the markets draw the consequences.

What was largely predictable has happened. The Governing Council of the ECB announced its monetary policy decisions, President Christine Lagarde commented on them at a press conference and the markets reacted accordingly.

The announcement of three rate hikes by the end of the year – including 25 basis points in July and possibly 50 in September – and the termination of the APP's 20 billion-a-month purchase program were enough to send the markets clear signs of difficulty. of the central bank. Too many opposing instances to reconcile and it is inevitable that investors do not believe that Lagarde succeeds in squaring the circle.

There are two signs of distrust of the ECB's capacity. The first was the reaction of the euro / dollar exchange rate which, after an initial slight appreciation, returned to fall below 1.06 and then stopped just above 1.05 on Friday afternoon. There are too many unknowns and risks looming over the future of the eurozone economy to believe that a rate hike could lead investors to buy euro assets. Not coincidentally, in the worst case scenario of the ECB, 2023 GDP is expected to decline by 1.7% (against a growth of 2.1% in the base scenario).

To make matters worse, consumer prices in the US also arrived on Friday afternoon, up in May by 8.6% on an annual basis, against expectations of 8.3%. Further straw on the fire of the Fed rate hike and therefore reason to sell euros.

Above all, however, the disappointment aroused by what Lagarde said (or not said) regarding the risk of fragmentation of the transmission of monetary policy due to the gap in the spreads between the yields of government bonds of the Member States was evident. It is not enough to say " that we will not tolerate fragmentation and will determine on the basis of circumstances how and when such risks are likely to materialize and we will prevent it" . And then, in the press conference, faced with the repeated questions with which they asked her how she plans to implement this purpose, remain very evasive. The only in-depth analysis was about the possibility of flexibility in the execution of the buybacks of PEPP program securities (but also APP) which will gradually expire. Too little, according to the markets. In fact, throughout the day they heavily hit the prices of the Italian ten-year (but Greece and Spain also suffered declines), which closed with a yield of 3.84%, at the highest levels for almost 10 years. The same fate also applies to the Italian stock index, driven downwards by banking stocks.

Bloomberg spoke of investors' real bewilderment about the absence of a plan to keep the eurozone together. Investors believe the ECB is very unlikely to move preemptively. It can do it, however, by mistreating the Treaties, only under the pressure of the markets, which are going exactly to test the ECB's resistance and intervention threshold. We had a demonstration of this in March 2020, when, despite the disastrous economic consequences of the lockdown from Covid were already evident, on March 12 Lagarde was still playing with the famous "we are not here to reduce spreads", except to take cover only six days later, launching a $ 1.8 trillion purchase program (PEPP).

"Whatever it takes" by Mario Draghi could only work in July 1992. Then rivers of pages from the European Court of Justice and the German Constitutional Court arrived to set well-defined stakes and now Lagarde, even if she wanted to, can no longer use the same sentence and is often forced to premise "within the limits of our mandate". That is, little or nothing. The markets know this and draw the consequences.

This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/mercati-bce-lagarde/ on Sat, 11 Jun 2022 04:35:19 +0000.