Five takeaways from the ECB's announcements - Finance

Five takeaways from the ECB’s announcements – Finance

The European Central Bank made a historic turning point on Thursday by announcing the imminent end of the controversial policy of negative rates in response to galloping inflation. Five takeaways from today’s announcements.

Air hole for the economy

The war in Ukraine is “disrupting trade, causing material shortages and contributing to higher energy and raw material prices”, while supply chain bottlenecks are not about to end. unwind, said the ECB, which paints a gloomy picture of the economic outlook. Without counting on a recession, it lowered its growth forecast to 2.8% for 2022 and 2.1% for 2023 But “economic activity should rebound again when the headwinds currently blowing ease”, added the institution, which raises its forecast for GDP growth to 2.1% for 2024. The ECB is banking on a solid labor market and budgetary support coupled with savings that will be freed up after having been accumulated during the pandemic.

“Inflation will remain undesirably high for some time,” said ECB President Christine Lagarde. With the war in Ukraine, “inflationary pressures have widened and intensified”. They now cover a wide basket of products and services beyond just energy costs, she explained.

For the euro zone, the institution has significantly raised its inflation forecasts for 2022 and 2023, with a projection of 2.1% in 2024, still above its target of 2%. In the medium term, the risks on inflation remain “on the rise”.

End of net asset buybacks

In this context, the ECB will stop its net purchases of assets “on July 1”, as it is a prerequisite before starting to raise its rates. Bond buybacks, which have flooded the market with liquidity, were launched in 2015 to combat the hydra of deflation, considered to be a poison for the economy. The ECB has since bought public and private securities on the market – 5,000 billion euros of bonds including around 1,800 billion euros under the emergency program against the pandemic – to lower costs. financing and get the economy moving again. However, the institution is now facing the opposite challenge of having to bring down inflation, which is why debt buybacks no longer have a reason to exist.

Rate: slow take off in July

To hope to reduce the rise in prices over time, the ECB will begin to raise its rates in July, which it had not done since May 2011, and will continue to do so in the following months. The priority is to quickly emerge from the era of negative rates, inaugurated in 2014 with the rate on bank deposits, currently set at -0.5%. It hits some of the dormant cash at the central bank, to induce commercial banks to distribute more credit to help the economy. The cautious ‘doves’ on the ECB board managed to limit the first planned rate hike in July to 25 basis points, but a bigger jump of 50 basis points seems very likely in September given the outlook for inflation , explains a source close to a central bank to AFP.

Vigilance on sovereign borrowing costs

The risk associated with the end of asset buybacks is to see the “spreads” widen, i.e. the gaps between the borrowing rates of the so-called fragile countries of the euro zone and those considered “safe”, such as borrowing German Bund at 10 years. Behind these differences, the idea is that the market demands a higher risk premium to finance countries in the euro zone whose public debt, inflated with the Covid-19 crisis, is at the limit of bearable. Ms. Lagarde, however, remained vague on Thursday as to the response that the institution would provide to this “fragmentation”, contenting itself with recalling that “if necessary”, it could “design and deploy new instruments”. Faced with this continuing vagueness, the Italian rate stood out even more on Thursday from the German benchmark rate, with a spread exceeding 200 basis points.

The war in Ukraine is “disrupting trade, causing material shortages and contributing to higher energy and raw material prices”, while supply chain bottlenecks are not about to end. unwind, said the ECB, which paints a gloomy picture of the economic outlook. Without counting on a recession, it lowered its growth forecast to 2.8% for 2022 and 2.1% for 2023 But “economic activity should rebound again when the headwinds currently blowing ease”, added the institution, which raises its GDP growth forecast for 2024 to 2.1%. Inflation will remain undesirably high for some time,” ECB President Christine Lagarde said. With the war in Ukraine, “inflationary pressures have widened and intensified”. They now cover a wide basket of products and services beyond just energy costs, she explained. For the euro zone, the institution has significantly raised its inflation forecasts for 2022 and 2023, with a projection of 2.1% in 2024, still above its target of 2%. In the medium term, the risks on inflation remain “on the rise”. In this context, the ECB will stop its net purchases of assets “on July 1”, being a prerequisite before starting to raise its rates . Bond buybacks, which have flooded the market with liquidity, were launched in 2015 to combat the hydra of deflation, considered to be a poison for the economy. The ECB has since bought public and private securities on the market – 5,000 billion euros of bonds including around 1,800 billion euros under the emergency program against the pandemic – to lower costs. financing and get the economy moving again. However, the institution is now faced with the opposite challenge of having to bring down inflation, which is why debt buybacks no longer have a reason to exist. To hope to reduce the rise in prices in the long term, the ECB will start to raise its rates in July, which it had not done since May 2011, and will continue to do so in the following months. The priority is to quickly emerge from the era of negative rates, inaugurated in 2014 with the rate on bank deposits, currently set at -0.5%. It hits some of the dormant cash at the central bank, to induce commercial banks to distribute more credit to help the economy. The cautious ‘doves’ on the ECB board managed to limit the first planned rate hike in July to 25 basis points, but a bigger jump of 50 basis points seems very likely in September given the outlook for inflation , explains a source close to a central bank to AFP. the euro zone and those considered “safe”, such as the 10-year German Bund. Behind these differences, the idea is that the market demands a higher risk premium to finance countries in the euro zone whose public debt, inflated with the Covid-19 crisis, is at the limit of bearable. Ms. Lagarde, however, remained vague on Thursday as to the response that the institution would provide to this “fragmentation”, contenting itself with recalling that “if necessary”, it could “design and deploy new instruments”. Faced with this continuing vagueness, the Italian rate stood out even more on Thursday from the German benchmark rate, with a spread exceeding 200 basis points.

.

Leave a Comment

Your email address will not be published.