Why can’t the ECB raise interest-rates for the Euro area?

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by Shaun Richards

Today has brought a reminder of our themes for 2021 and also a much longer running one. So let us start with the longer-running one.

(Bloomberg) Under current conditions and inflation forecasts, “an increase in interest rates is not expected in 2022” ECB Governing Council member Pablo Hernandez de Cos says in interview with Spanish television broadcaster TVE.

The European Central Bank or ECB has been hammering out that message for a while now. Indeed its President was on the case today as well.

PARIS, Jan 20 (Reuters) – Inflation in the euro zone will decrease gradually over the year as its main drivers, such as surging energy prices and supply bottlenecks, are expected to ease, European Central Bank (ECB) head Christine Lagarde told France Inter radio.

That is an interesting line of argument from someone who this time last year was telling us that inflation would average 1% in 2021 and 1.1% in 2022.How is that going? Next we got her policy prescription.

Asked on her policy to counter price pressures, Lagarde reiterated that the ECB did not need to act as boldly as the U.S. Federal Reserve because of a different economic situation.

In her next bit there is quite an admission of failure.

“The cycle of the economic recovery in the U.S. is ahead of that in Europe. We thus have every reason not to act as rapidly and as brutally that one can imagine the Fed would do,” she said, adding that inflation, too, was higher in the U.S.

We have received a lot of hype from her about the Euro area recovery but now we are getting some truth that it is well behnd the US. She does have a point about inflation which is running more than 2% higher in the US but she is still well above target. I also find it interesting that an interest-rate rise totaling around 1% ( should it happen) is described as acting “brutally” which is revealing I think.

Then she looked to double-down on the mess as so far all she has done islet a programme she kept expanding come to its conclusion in March.

“But we have started to react and we obviously are standing ready, to react by monetary policy measures if the figures, the data, the facts demand it,” she said.

Actually they have been demanding it in inflation terms for a while. Then we moved to what is in fact misleading. She has spotted that the benchmark bund yield went positive yesterday but is ignoring the fact it is following US yields and the US recovery she has already mentioned.

“If the yields rise again, this means that the fundamentals of the economy are improving”, Lagarde said.

So the theme here is of no interest-rate increases this year which feeds into my music  lyric inspired view of the ECB and interest-rates.

We’re caught in a trap
I can’t walk out
Because I love you too much, baby

On that road I was asked about a Britcoin yesterday and a Euro digital coin seems more immediately likely for when they want to take interest-rates even more negative.

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This has come up with rather a different perspective on things this morning.

Norges Bank’s Monetary Policy and Financial Stability Committee has unanimously decided to keep the policy rate unchanged at 0.5 percent.

“Based on the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised in March”, says Governor Øystein Olsen.

The bit that should echo in the Frankfurt Towers of the ECB is here.

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Monetary policy is expansionary.

So if an interest-rate of 0.5% is expansionary what is one of -0,5%? Of course we have even had a -1% one for the banks. The critique continues.

 In the Committee’s assessment, the objective of stabilising inflation around the target somewhat further out suggests that the policy rate should be raised towards a more normal level.

That is the exact opposite of what Christine Lagarde is trying to argue.


This morning produced a number which is one of the highest so far.

WIESBADEN – Producer prices for industrial products were 24.2% higher in December 2021 than in December 2020. As the Federal Statistical Office (Destatis) also reports, this was the strongest year-on-year increase since the survey began in 1949.

Indeed the monthly one was even worse.

Compared with November 2021, the commercial producer prices by 5.0%. In a month-on-month comparison, this was the strongest increase recorded to date.

So quite a surge which at first looks to be slightly odd as we have seen reports of lower oil prices in December.

The price trend for energy continues to be primarily responsible for the increase .

But then we note that other energy costs are included and the gas ones are eye-watering.

Energy prices in December 2021 were on average 69.0% higher than in the same month last year . Compared to November 2021, these prices increased by 15.7%. The largest influence on the year-on-year rate of change in energy was natural gas in distribution (+121.9%) and electricity (+74.3%).

There is an obvious inflation issue here. But as we have been observing with the fertiliser industry there is also an economic activity one as prices have at times gone so high that energy intensive businesses are made uneconomic.

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Even without the energy factor we would still have double-digit rises.

Excluding energy, producer prices were 10.4% higher than in December 2020 (+0.7% compared to November 2021).

As we stand there are a whole raft of products with much higher prices.

Metals overall had the greatest impact on the year-on-year rate of change for intermediate goods, up 36.1%. Here the prices for pig iron, steel and ferroalloys increased by 54.4%. Non-ferrous metals and their semi-finished products cost a total of 24.5% more.

The price increases compared to the previous year were particularly high for secondary raw materials (+69.1%), packaging materials made of wood (+66.9%) and fertilizers and nitrogen compounds (+63.5%). 8% rose. Softwood lumber was 61.5% more expensive than in December 2020.


There are as ever contrary moves happening at the same time. For example some Euro area countries are reporting lower inflation rates. But if we look at France a lot of that is that energy companies have not been allowed to raise domestic energy prices by more than 4% in 2022. So there is a deferral going on and maybe a lumping of risk on the taxpayer. So you could argue that Euro area inflation is above 5.3% if energy prices were not being manipulated.

That then begs the question off when would the ECB raise interest-rates? After all whilst inflation has risen the HICP measure ignores this.

Rents and house prices in the EU have continued their steady increase in Q3 2021, going up by 1.2% and 9.2% respectively, compared with Q3 2020.

Let us remember that this has been a deliberate policy by the ECB of pumping up house prices to claim “wealth effects”. Or if you prefer the rich and especially the very rich get richer.It does nothing for the poor and in fact makes them worse off.

So we are left wondering what would make the ECB raise interest-rates? As we stand it looks even less likely than before. One consequence of this has been a weaker Euro. It has been nothing dramatic but the UK Pound has touched 1.20 this morning. Such moves may be reinforced by another impact of higher energy prices.

As a result, the euro area recorded a €1.5 bn deficit in trade in goods with the rest of the world in
November 2021, compared with a surplus of €25 bn in November 2020. The last time that euro area recorded a
deficit was in January 2014.


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