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How and why Minister Crosetto overwhelms the ECB

1 year ago babelfish

How and why Minister Crosetto overwhelms the ECB

The decisions of the ECB and the comments of economists, analysts and ministers (Salvini and Crosetto)

Storm not only political on the ECB.

Ministers of the Meloni government, Bocconi economists and analysts criticize the moves and words of the ECB.

Here's what happened.

Yesterday the ECB raised interest rates by 50 basis points, announced a probable recession in the Eurozone next year and launched Quantitative Tightening (QT) starting in March. The hawkish tones of the president Christine Lagarde and the downward growth forecasts frighten the markets while the start of the QT in March with an amount higher than the minimum assumed (15 vs 10 billion euros) helped to bring the spread back above 200bps.

WHAT THE ECB HAS DECIDED ON RATES AND SECURITIES

The Governing Council of the ECB has decided to increase the three reference interest rates by 50 basis points. As a result, the central bank explains in a statement, “the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 2.50%, 2.75% and 2% respectively. .00% starting from 21 December 2022”. The Council believes that “interest rates still need to increase significantly at a steady pace to reach levels restrictive enough to ensure a timely return of inflation to the 2% target over the medium term”.

ECB NUMBERS AND FORECASTS

As of early March 2023, the Asset Purchase Program (AFP) portfolio will be reduced at a measured and predictable pace, as the Eurosystem will only partially reinvest the principal payments from maturing securities. The pace of this reduction will average an average of 15 billion euros per month until the end of the second quarter of 2023 and will then be determined over time, explains the ECB. As regards the Pepp, the ECB "intends to reinvest the capital repaid on maturing securities" of the Pandemic emergency purchase program "under the program at least until the end of 2024", communicated the Eurotower adding that "the future reduction of the PEPP's portfolio will be managed so as to avoid interference with the appropriate monetary policy orientation”.

THE REACTION OF THE VICE-PRESIDENT OF THE COUNCIL, MATTEO SALVINI

“It is incredible, disconcerting and worrying that while there is a government that is doing everything to increase salaries and pensions and cut taxes, the ECB, on an afternoon in mid-December, approves a law that burns billions of euros of savings in Italy and throughout Europe by making the spread jump ”. Thus the Deputy Prime Minister and Minister of Infrastructure and Transport, Matteo Salvini, commenting on the decision announced by the ECB to increase interest rates by half a percentage point. “It is incredible, disconcerting and worrying that while there is a government that is doing everything to increase salaries and pensions and cut taxes, the ECB, on an afternoon in mid-December, approves a law that burns billions of euros of savings in Italy and throughout Europe by making the spread jump ”. Thus the Deputy Prime Minister and Minister of Infrastructure and Transport, Matteo Salvini, commenting on the decision announced by the ECB to increase interest rates by half a percentage point.

THE TWEETS OF THE MINISTER OF DEFENSE, GUIDO CROSETTO

"I did not understand the Christmas present that President Lagarde wanted to give to Italy". Thus the defense minister, the entrepreneur and manager Guido Crosetto, commenting on Twitter on the decision of the ECB to raise rates. Posting, then, a graph showing the collapse in the price of a BTP due to expire soon, the minister adds: "For those who have not understood the effect of decisions taken and communicated lightly and detachedly". And, again, referring to the collapse of the stock exchanges, in another tweet he adds: "After Milan and Frankfurt it's up to the Nasdaq".

THE COMMENT OF THE ANALYST LITURRI

"They intend to bring down prices by leaving people on the street." Thus commented the analyst Giuseppe Liturri on Start Magazine : “Christine Lagarde and her colleagues are not frightened by the prospects of a recession, which they consider to be short-lived and shallow, limited to the two quarters between 2022 and 2023. induced to move using a vocabulary that has only sown alarm, are the forecasts on inflation. It is disconcerting to see – just 3 months after the last September projections – that the forecast for 2022 goes from 8.1% to 8.4%. Even more serious is the figure for 2023, which goes from 5.5% to 6.3%. Even more worrying is the figure relating to "core" inflation (net of energy and food) which is expected to rise from 3.9% in 2022 to 4.2% in 2023. A sign that by now the fire that started with energy products has well propagated to the rest of the economy and is still expected to increase further. Let's avoid raging by reporting the forecasts formulated starting from September 2021 – with the surge in energy prices already underway – or that of March 2022 – with the exacerbating effect of the war in Ukraine already evident – because the conclusion would be to raise legitimate and well-founded doubts about the modus operandi of the "independent" technicians in Frankfurt. In just a few months, they have gone from being "transitional" to shouting "fire, fire" in a disordered way, based on forecasts which – if they showed the same degree of reliability as those produced so far – would have the only effect of dragging us into a recession, without not even moderate inflation”.

THE MONEYFARM ANALYSIS

The comment by Roberto Rossignoli, Portfolio Manager of Moneyfarm, was less negative: “It is in this context that the 50 basis point increase announced today should be read. Although it was widely expected by financial operators, the rhetoric could only be restrictive: the governor of the ECB announced that there will be further "significant" hikes in the coming months and that the quantitative tightening (reduction of the securities portfolio accumulated over years of quantitative easing) it will start in March 2023, albeit proceeding gradually. Fighting inflation remains the main focus and governments will have the task of easing its impact on the real economy with their fiscal policies. The markets reacted very nervously. If in the first hours after Powell's conference they had withstood a less accommodating rhetoric than expected, from Lagarde's statements they received definitive confirmation of the weakening of the dominant narrative of recent months, namely that monetary tightening had finally reached its peak. For this reason, substantially, we are witnessing the surge in European government rates and the loss of ground for equities with the European one, in particular, which has already lost more than 2%”.

EXTRACT FROM THE ANALYSIS BY THE BOCCONI ECONOMIST, DONATO MASCIANDARO, FOR IL SOLE 24 ORE ON THE MOVEMENTS OF THE ECB

Smokey words. They are the ones with which President Lagarde illustrated the strategy of the ECB. If the economy and markets need transparency, Frankfurt continues to use an inverse code: repeating empty formulas. And if the central bank is voiceless, it is inevitable that there will be an increase in central bankers who offer individual and inopportune information – the peacocks – or anonymous and destabilizing information – the crows. Peacocks and crows are a toxin for European monetary policy.

Yesterday the by now trite ceremonial of communication without information was repeated. Having announced the fifty basis point increase in interest rates, stating that the ECB Council "expects to raise them further (…) in order to ensure a return to the two per cent objective" means saying that if it rains you have to open your umbrella . The announcement on the liquidity action, which will begin next March, is only an exception with respect to the general approach, repeatedly reaffirmed yesterday by President Lagarde. The ECB has abolished announcements on the future path of interest rates, in favor of adopting the opportunistic policy of "meeting after meeting": no commitments are made, therefore, by definition, no mistakes are made. Too bad it's a policy that represents the exact opposite of what would be necessary to try and steer expectations in the right direction. Expectations on which both inflation risk and recession risk depend. And the ECB instead of directing the economy behaves like the most classic of hamsters on the wheel.

The corollary of the policy of silence is represented by press conferences whose fruition increasingly resembles a clear waste of time. For some months, we have continued to follow them to hope for a pleasant surprise, in terms of better knowledge of the ECB's action. Unfortunately, this hope has so far been in vain. The information deficit then has a further negative effect: the number of peacocks is increasing.

But who is the peacock? He is a central banker who speaks when he shouldn't, that is, makes inopportune statements. In turn, an inopportune statement can be defined precisely: it is a statement on monetary policy in the days of information embargo, which precede the official communications of the respective central bank. For the ECB there are seven days of embargo. In Frankfurt, the peacock phenomenon has increased in recent years. In embargo days, a central banker has two options: don't talk; make appropriate declarations, i.e. compliant with the rules of the embargo. Or he's a peacock: he makes inopportune statements. A systematic search of euro bankers' declarations in the period from October 2008 to December 2019 found that in the embargo periods there were a total of 991 declarations by 68 different central bankers. Of these, 134 violated the rules of the embargo: they were peacocks talking. No one has been fined. If we observe the temporal distribution of all the declarations recorded in the periods of embargo, over the years, after a peak recorded in the years of the Great Financial Crisis, the trend has been declining: the average central banker has deemed it appropriate to avoid speaking. Peacocks, on the other hand, have behaved in the exact opposite way in recent years: they have increased their frequency. Why do they do it? The econometric analysis of the possible motivations of peacocks linked to the economic situation shows an interesting fact: the more inflation, or interest rates, are distant from the European average in the country of the peacock, the more likely it is that the peacock will leave. Confirming that the peacock is moved by individual and national interests, certainly not general and European ones. The peacock's behavior is neither professional nor ethical. But it gets worse. In Frankfurt there are also crows: central bankers who reveal, anonymously and preferably to the international press, contents of board meetings that should instead remain confidential. Let's see if the crows caw again this time.

This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/come-e-perche-il-ministro-crosetto-strapazza-la-bce/ on Fri, 16 Dec 2022 07:28:54 +0000.