European Central Bank shuts down quantitative easing and announces pressure

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Shopping ends on July 1st. The first rate hike, from 25 basis points, at the upcoming board meeting on July 21. The second increase in September, but the dimensions of which have not yet been determined, “will depend on revised inflation expectations”: a rise of at least 50 basis points may be necessary “if inflation expectations continue or worsen.” Then we will continue the gradual and continuous pressure. The new maneuver of the European Central Bank, decided unanimously by the June Council, which was held in Amsterdam, was all summarized in the official statement, which was issued before the press conference.

Partial shield against fragmentation

There is also a shield against the increase in margins, but only partially. The reinvestment of securities payable is envisaged which, in relation to securities purchased under the Pepp pandemic program, can be implemented in a flexible manner “in the event of market segmentation associated with a pandemic”, not for other considerations. A way to avoid moral hazard and opportunistic behavior on the part of governments. European Central Bank President Christine Lagarde, at a press conference, also specified that a possible diagnosis of fragmentation cannot be based on a single component.

Flexibility in monetary policy

However, in several parts, in the press release, flexibility is mentioned as a key component of monetary policy should the transmission chain of central bank decisions be damaged, and excessive widening of spreads is certainly one such factor. Government bond yields, the least risky, are actually the “floor” of bank rates and all financial rates; Moving away from that, for a country, means having a tighter grip than elsewhere.

return inflation to 2%

The tightening will continue until expected inflation returns to the 2% target. Forecasts, revised, point to an average of 6.8% in 2022, 3.5% in 2023 and 2.1% in 2024 – with core inflation of 3.3% in 2022, 2.8% in 2023 and 2.3% in 2024 (and thus above the overall index ). This is a sign of price increases that are not only persistent, but also widespread, generalized and at a level, “undesirably high” (and above target), the statement explained.

Expectations and wages

Lagarde said inflation expectations, which had begun targeting above 2%, required “close monitoring”. Negotiated wages have also gone up even though, as the President explained, “there are no indications of a wage-price vortex.” In March, the inflation rate for 2024 was expected to be 1.9 percent.