ECB abandons strategic ambiguity on rate hikes

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Christine Lagarde broke one of the central bank’s golden rules. In a blog post on Monday, the President of the European Central Bank actually gave unequivocal forward guidance on the likely path of interest rates in the months ahead. By pledging to raise borrowing costs, Lagarde signals that ECB hawks have won the argument that the current rise in inflation reflects a structural change in the global economy that will push negative rates into the history books.

Lagarde was bold enough to indicate when and by how much the official deposit rate will rise, as well as specifying that the purchase of bonds under the asset purchase program should end in July. That’s a good thing, meaning an initial 25 basis point hike at the July meeting should be repeated at the following September meeting, ending sub-zero rates in the eurozone after eight long years.

Lagarde’s key message is:

“I expect the net buying under the APP to end very early in the third quarter. This would allow us a rate hike at our July meeting, in line with our forward guidance. Based on from the current outlook, we will likely be able to exit negative interest rates by the end of the third quarter.”

I find it hard to remember a central banker, certainly not one from the ECB, ever being so definitive on the outlook for monetary policy. It looks like a necessary capitulation by the previously pacifist Lagarde to avoid a damaging split in the Board of Governors, and it is a weakness disguised as a strength. After a decade of unbridled easing, I had long expected to end my career never to see the ECB tighten monetary conditions again.

To be fair, there is some leeway if growth were to slump dramatically or disinflation threatens to return. But the economic context would have to change substantially if we did not want to lose all credibility. Lagarde and Philip Lane, the ECB’s chief economist, saw their “data-dependent” watch-and-wait line run out of steam. Attempts to inject some strategic ambiguity, including the duration of rate hikes once quantitative easing freezes, have never had any real persuasion. Admittedly, the euro money markets have ignored this by forecasting several increases by the end of this year. Lagarde’s blog post therefore merely catches up to expectations rather than setting a new agenda.

Lagarde had repeatedly stressed in December that the ECB was “very unlikely to raise rates in 2022”, but at the March meeting there were reports that a significant minority of policymakers wanted a change. immediate monetary stance. Since then, the chorus of board members calling for a faster end to QE that would augur higher borrowing costs has swelled to what looks like a majority. The new warmongering of the ECB seems to have put a floor under the euro, which seemed to be heading without remorse towards parity with the dollar.

The real risk of Lagarde’s sudden conversion to the hawkish camp is a sharp downturn in the euro economy of the kind already seen in the UK, with consumer confidence and retail spending hitting a wall. Hopefully this sudden burst of clarity from the ECB won’t be undermined by a case of what might be called ‘Bank-of-England-itis’, which infected Britain’s central bank in November when its policy committee monetary policy backtracked on what the market had taken to be a promise to raise interest rates, giving global markets a nasty boost. At least the ECB has some fiscal support to sustain growth even as it tackles inflation, with Germany backing European Union plans to remain lenient on state-to-state fiscal discipline. nation.

If inflation does not decline closer to the ECB’s 2% target, markets expect further increases in borrowing costs that would push official rates back into positive territory by 2023. Policymakers need to avoid repeating the mistake made by Jean-Claude The Trichet-led ECB in 2011, when it continued to tighten policy even as the European debt crisis unfolded and the region headed into recession. Timing is everything; let’s hope the ECB strikes the right balance this time.

More from Bloomberg Opinion:

• Prepare for even greater electric shocks: Javier Blas

• BOE’s Bailey proves inflation targeting is wrong: Richard Cookson

• Zero is a good destination for ECB rates: Gilbert and Ashworth

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was Chief Market Strategist for Haitong Securities in London.

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