The ECB is getting ready to fire a peashooter

by Shaun Richards

This morning there are quite a few economic arrows pointing at the Euro area and by consequence the European Central Bank or ECB. One was unintentionally fired by the Bank of Canada yesterday.

Today, we raised the policy interest rate by 100 basis points, or 1%. An increase of this magnitude at one meeting is very unusual. It reflects very unusual economic circumstances: inflation is nearly 8%—a level not seen in nearly 40 years.

So in a similar inflation scenario ( in fact the Euro area is a bit worse) we see a 1% rise which will be contrasted with this.

Second, we announced our intention to raise the key ECB interest rates by 25 basis points at our July monetary policy meeting and to raise them again in September.  ( Vice President de Guindos)

That 0.25% now looks like a peashooter compared to the bazooka fired by Canada and frankly who is going to take much note of 0.5% maybe in September right now?

The size of the interest rate increase in September will depend on the updated medium-term inflation outlook − if the medium-term inflation outlook persists or deteriorates, an increment of more than 25 basis points will be appropriate.

Actually even ECB supporters are now thinking that the pre commitment to 0.25% this month has been overtaken by events.

ECB (rates) preview: being asked about a 50bp hike next week, again and again. There is no easy way out, having signaled their “intention” to hike by 25bp. My advice would be for the @ecb  to abandon forward guidance altogether ( @fwred)

There you go Fred and I can agree! Although I have been telling them to abandon Forward Guidance for years which is a bit different to a road to Damascus journey this morning. But when even your cheerleaders are against you…

Still, if the ECB hikes by 50bp in July despite explicit, written guidance for 25bp (including a blog from the president), communication will be very tricky.

Actually it would be consistent with the track record of its President Christine Lagarde who has had a talentless ascent to the role and people from Greece and Argentina will have much stronger words about her.

Let us move on but keep in our heads the relative position that Canada now has an interest-rate some 3% higher than the ECB.


The problem above is bad enough but the ECB looks set to be pulled in another direction by developments in a place we have long expected.

Italy’s Five Star Movement will boycott a key vote over an aid package Thursday, putting the survival of Prime Minister Mario Draghi’s government at risk.

That poses more than one question as former ECB President Mario Draghi was parachuted into the job

Draghi strongly signaled he would hand in his resignation if Conte went ahead with his walkout.

One of the things on the list is a frequent occurrence these days.

The Rome Senate will hold a confidence vote Thursday on measures for businesses and households hit by high energy prices.

That is associated with the economic crisis that has taxi drivers protesting outside Mario Draghi’s office. There is also a drought so Glenn Frey was right literally as well as figuratively.

The heat is on, on the street
Inside your head, on every beat
And the beat’s so loud, deep inside
The pressure’s high, just to stay alive
‘Cause the heat is on

So we may be approaching a situation where the ECB anti-fragmentation tool is actually needed. Such was the level of complacency that some were speculating earlier this week that its very existence means it will never be required. There is another irony in that in his previous role Mario Draghi did pull off a type of Jedi-Mind Trick as his OMTs were never used.

This has led to plenty of speculation.

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Key question we flagged for the new ECB anti-fragmentation tool is political crisis in Italy. Do wider spreads due to such a crisis constitute fragmentation? And if the ECB moves to contain Italy’s spread in such a shock, doesn’t that “enable” irresponsible behavior by populists? ( @RobinBrooksIIF )

The problem here is that the very concept of closing bond spreads is political. That is added to by the fact that for all the talk of “conditionality” the ECB is between a rock and a hard place because if it let’s Italy go then it is large enough to take the Euro with it. There is a further irony in that it was Mario Draghi who declared the Euro to be “irreversible” and promised to do “Whatever it takes” to save it.

It was only on the 23rd of May that President Lagarde was setting out the end to the flow of QE which lasted only until this on the 28th of June.

If spreads in some countries respond in a rapid and disorderly way to an underlying change in risk-free rates, over and above what would be justified by economic fundamentals, our capacity to deliver a single monetary policy is impeded…….In such conditions – when we have what we describe as unwarranted fragmentation – preserving policy transmission is a precondition for returning inflation to our target.

In such a scenario they would be back in the QE game although no doubt under a different name and accompanied by a barrage of denials.

The Economy

Italian politics is notoriously volatile so let us move onto this morning’s economic forecasts from the European Commission.

Headline inflation until June has hit record highs as energy and food prices continued growing and price pressures broadened to services and other goods. In the euro area, inflation grew strongly in the second quarter of 2022, from 7.4% in March (y-o-y) to a new all-time high of 8.6% in June.

That is somewhat different to what the Financial Times reported on the 3rd of December last year.

Christine Lagarde says EU inflation a passing ‘hump’ and 2022 rate rise ‘very unlikely’

If we stay with the “hump” claim there is also this.

The forecast for inflation has been revised considerably upwards compared to the Spring Forecast………Inflation is projected to peak at 8.4% y-o-y in the third quarter of 2022 in the euro area and from there decline steadily and fall below 3% in the last quarter of 2023,

They have no idea whether that will happen in 2023 and should anything like it happen then it will have been caused by more of this.

Growth in the euro area is expected at 2.6% in 2022, moderating to 1.4% in 2023.

Which replaced this.

Real GDP growth in both the EU and the euro area is now expected at 2.7% in 2022 and 2.3% in 2023, down from 4.0% and 2.8% (2.7% in the euro area), respectively, in the Winter 2022 interim forecast (WiF).

At this point I would like to remind readers that such forecasts do not mean they believe economic growth will be 2.6% this year. The purpose they serve is that they will be able to look back and point out that they predicted a decline when the risk of of the numbers being much worse.

At the moment there is something which could make things a lot worse.

The Rhine water level is dropping **very fast**. Down this morning to 89 centimeters at the Kaub gauge (normally, it should be >200cm at this time of the year). ( @JavierBlas )

The drought problem is across a fair bit of Europe and as well as the obvious issues it has led to this.

Some German power plants are not getting enough coal delivered because of low levels on the river Rhine, threatening to derail the country’s plan to store more fuel ahead of winter ( Bloomberg)

Whilst we are looking at energy issues.

Russia’s ForMin Spokeswoman: Nord Stream 1’s Future Work Will Depend On Gas Demand And “One-Sided Sanctions” ( @LiveSquawk )


The situation is not just of a crisis enveloping the ECB towers in Frankfurt but of several different ones at once. The problem is that the treatments involve in moving in different and mostly opposite directions. Some of its problems have been created by the very concept of the Euro with its now 20 members with different fiscal and political policies. Some are its own fault like the ridiculous claims that the coming inflation surge was a “hump” which means I need to point out again that my alma mater made quite a fool of itself here.

Christine Lagarde receiving honorary doctorate at LSE from Minouche Shafik


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