A new sharp rise in interest rates from 75 basis points, as in September. A possible squeeze on the ‘Tltro’ maxi-loans which are granting too rich profits to the banking system while the rest of the economy suffers. And the possible hint of quantitative tightening, that is, the backtracking from bond purchases that could start in the second half of 2023, but without jolts.
This is what is to be expected from the meeting that began in the evening at dinner in the ECB building in Sonnemanstrasse, in Frankfurt, to end in the next few hours with the announcement and then the press conference of President Christine Lagarde.
Where could replies to the words of the new Prime Minister Giorgia Meloni arrive, who in the Chamber had evoked a “risky choice” on rates by lengthening the list of national policy discontents after the French Macron and the Finnish Sanna Marin.
It is possible that Lagarde remembers the independence of the ECB from the demands of politics, the foundation of the credibility of any central bank. But the first response to the stomach ache of politics, which arise from the realization that the Eurozone is on the verge of recession and raising rates risks exacerbating it, will come from the decision on rates. “The ECB will quietly raise another 75 basis points despite the recession on the horizon”, explains Marco Valli, global head of economic research at Unicredit, in a report. Because in spite of economic data such as the SME indices, the job market holds up and companies continue to hire.
Both Macron and the Finnish premier had insisted that inflation comes from energy, and that the ECB cannot think of containing it by compressing demand to the point of pushing countries into recession, an option candidly recognized by Fed President Jay Powell. Lagarde, in all likelihood, will remind them that the genius of inflation has come out of the lamp: with the nominal rate now hovering towards 10%, even ‘supercore’ inflation, purified of food, energy and seasonal factors, is now 5.8%. And that a “normalization” of monetary policy – still very expansive – towards a neutral level is unavoidable if one does not want to blow the heat.
A point for the ‘hawks’ in the ECB Council gathered around the Bundesbank, with many Nordic governors dealing with inflation at over 20% and who for now are the majority on the patrol of ‘doves’ gathered around France, Italy and to the member of the Executive Committee Fabio Panetta. But inflation, with the transition to 2023, gross of the gas unknown could begin to slow down for statistical reasons. The recession due to the energy shock would give a further blow to the price trend. This is why already in the following meeting, that of December 15, the ECB could already slow down with a hike of half a point that would bring the deposit rate (which would rise to 1.5% after two three-quarter point hikes) to 2%. , approaching the coveted “neutral” rate. From here on, a pause for reflection is possible: especially if the new forecasts that the ECB will release in December indicate the return of inflation to 2% by 2025, providing the governors with an excellent argument to stop in 2023. Once normalization is complete , it will be up to undo quantitative easing: but very calmly, letting the bonds purchased reach maturity without reinvesting them. (HANDLE).