The ECB has only produced panic on rates and securities
What has the ECB decided on rates and securities, how the markets have reacted and why the moves of the Central Institute chaired by Lagarde are contested. Giuseppe Liturri's analysis
A panic-stricken ECB that quickly spread across all currency, equity and bond markets.
It is not so much the measure of the rate hike (+0.50%) for all the three main reference rates controlled by Frankfurt, as the unusual harshness of the language used with reference to future prospects.
According to the Governing Council's press release, " keeping interest rates at restrictive levels will cause inflation to decrease over time by curbing demand and will also protect against the risk of a persistent increase in inflation expectations " and therefore " believes that the 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 ”.
And these last words are repeated several times, almost obsessively, in the release then commented on at the press conference.
Christine Lagarde and her colleagues are not scared by the prospects of a recession, which they believe will be short-lived and shallow, limited to the two quarters between 2022 and 2023.
What has led them to move using a vocabulary that has only sown alarm are the inflation forecasts.
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.
In short, they intend to bring down prices by leaving people on the street.
In the eagerness to demonstrate that they are doing something – regardless of the dubious effectiveness – from the Eurotower they have also sent out threatening signals on the fiscal policy front. It must provide targeted and temporary aid and in any case must not discourage the containment of energy consumption, otherwise – they warn – the ECB will have to further exacerbate rate hikes. There is no lack of reference to the reduction of the high public debt and, who has ears to hear, understand.
Finally, in order not to miss anything, there is also the plan to reduce the securities held in the portfolio with the APP program launched in 2015, under which the ECB holds Italian public securities for 446 billion at the end of November, to which added those purchased with the PEPP pandemic program launched in March 2020. The reinvestments of the securities of the latter program will continue at least until the end of 2024, while for the APP program it is expected to reduce the reinvestments from March to June 2023 for 15 billion a month on average. Translated into numbers, this means that out of about 131 billion of securities maturing, the ECB will reinvest only 71. Considering that public securities account for approximately 78% of the program and that Italian securities account for approximately 18%, it is about 2.1 billion per month of BTPs that will reach maturity and will have to find an alternative buyer to the ECB.
The general impression one gets from today's verbal threats from the ECB is that the loss of credibility suffered over the last 18 months is burning badly and that, in an attempt to recover ground, they are now falling into the opposite extreme.
Since there is no shortage of precedents – Jean Claude Trichet in 2008 and 2011 on the eve of two recessions – let's just hope we're wrong.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/la-bce-ha-prodotto-solo-panico-su-tassi-e-titoli/ on Fri, 16 Dec 2022 05:05:42 +0000.