A “red October” (at least on paper) threw the ECB into panic mode. The monetary policy of the European Central Bank (ECB) has given surprising turn in recent weeks. As if it had suddenly seen something very dangerous on the road and with a certain impression of wanting to correct a mistake (like that of 2011 when it raised rates in a moribund economy), the ECB is once again paving the way for an era of rate cuts that could bring the price of money even below the neutral level (that compatible with full employment and inflation in line with the objective). Behind this strike flashbackthere is perhaps a certain psychoanalysis: it seems that no one at the ECB wants to go down in history for having done too little to keep the economy and the single currency alive. Nobody wants to become the new Trichet. However, when we look back and examine in isolation the “real” data released to date, we can see an idyllic scenario, a macroeconomic “framework” that Lagarde would not have imagined even in his wildest dreams. crazier than a year ago: soaring inflation. around 2%, GDP growing moderately by 0.4%, a solid labor market and slowing wages. However, the ECB is in panic mode.
To understand the current context, it is crucial to recall how 2011under the presidency of Jean-Claude Trichet, the ECB raised the reference interest rate by 25 basis points for two consecutive quarters, reaching 1.5% and generating a critical situation which almost disintegrated the euro zone. The error, moreover, occurred after 2008, when the Eurobank increased its rates just before the mortgage crisis. subprime of the United States will lead to the bankruptcy of Lehman Brothers and the world as we know it will change forever.
After the 2011 mistake, the ECB attempted to correct the error with a historic battery of budget cuts and the launch of several stimulus programs (bond purchases to inject liquidity) that would prevent the breakup of the euro , but which would forever change the functioning of the euro. monetary policy and the European financial system. Because History will remain the phrase of the greatest representative of this large-scale “correction”: the “whatever it costs“(“whatever it takes”) Mario Draghi.
Carsten Brzeski, global head of Macro at ING, notes in a recent note that “the ECB has made a notable shift towards a more lax policy.” The decision to cut interest rates in October was justified, as ECB President Christine Lagarde explained, by the argument that disinflation was gaining strength, allowing the organization to act without excessive pressure. However, Brzeski believes that comments from some ECB members this week “clearly show that what appeared to be a balanced decision to gradually reduce the level of monetary policy tightening is now turning into a decision panic about rushing to reach a neutral position as quickly as possible“.
Bad October data (some disastrous PMIs) and the drop in oil opened the door for the ECB to trigger an era of budget cuts in the style of Mario Draghi, former ECB president, known for easing monetary policy beyond “natural” limits to save the euro zone. Although the ECB now appears ready to embark on a similar run, the truth is that inflation is close to target, GDP is growing little but growing, and the labor market is in excellent health. In 2012, the Eurozone was in recession and the labor market was “in disarray.”
Now, fears that the eurozone could slide into recession, driven by Germany and its industrial sector, with France also showing anemia, takes control of an ECB that could now raise rates up to 1.5% quickly and forcefully. A level significantly lower than that expected until recently. With increasingly pyrrhic growth (especially if we compare it to that of the “American friend”), plummeting oil and strengthening disinflation, it seems that the central bank I’d rather go too long (reduce) than not be up to par (keeping rates in restrictive territory) and ends up being considered, once again, as the culprit of another major crisis in the eurozone.
Even if official data does not yet justify a major revision of macroeconomic projections, fear of prolonged stagnation has regained importance within the central bank. As Brzeski points out, “this new pessimism must respond to an increasingly clear perception that the economy is once again trapped in a structural weakness“.
The truth is that the recent slowdown in inflation is partly due to temporary factors such as falling energy prices, while underlying inflation, notably in services, remains high, giving still a little hope for the hawks. But the flat graph on the screen of the vital signs of growth in a world that keeps moving and becoming dynamic (The United States and China are the two big “poles” when we talk about competitiveness) has brought back fear and, to a certain extent, guilt.
ING: “As a result, it seems that the ECB has returned to the 2010s”
The background speech demonstrates this. For example, it is interesting to note that, unlike in recent times, the ECB has stopped emphasizing structural factors that could increase inflation in the long term. “What happened to the arguments over green inflation or the demographic impact and the globalization» asks Brzeski, recalling that until recently the ECB claimed that these structural factors exerted upward pressure on prices. “What happened to the old central bankers’ narrative that monetary policy cannot solve the ‘structural’ problems of an economy? based on comments made by officials not long ago. “As a result, it seems that the ECB has returned to the 2010s”sentence.
“The ECB now appears determined to anticipate the trend and bring interest rates back to neutral as soon as possible. For supporters of this position conciliatory or accommodative, this is a no-brainer, and for the hawks the argument could be that quickly bringing rates back to a neutral level could be enough to avoid a new episode of unconventional monetary policy with quantitative easing and interest rates negative later”, decides the ING strategist.
By expanding the previous definition a little further, the neutral type The one to which analysts refer is defined as that which “balances the overall demand of an economy with its overall supply”, according to economists at CaixaBank Research. In other words, according to these same experts, it is the interest rate set by the central bank which “would allow the economy to operate at full employment and with price stability”. ECB calculations place the neutral real interest rate close to 0%. Thus, if inflation remains at current levels, the Eurobank should keep its rates close to 2% (the nominal neutral rate) compared to current rates, or even above 3%.
If disinflation continues and economic weakness hits harder, the ECB would find itself in the position of leaving key rates still below this mark. If the market has already started to adhere to this thesis, by betting on a terminal rate (the last of the bearish cycle) of 1.75%, analysts are going even further. Mathieu Savary, chief strategist of BCA Researchthe season already opened a few weeks ago at elEconomista.es considering a terminal rate of between 1% and 1.5%.
Capital Economics: “In this context, the mood within the ECB Governing Council has already darkened”
Now, other analysis houses such as Economics of capital. “In light of the deteriorating outlook for economic growth and inflation in the euro area, we are significantly lowering our ECB interest rate forecasts. We now believe that the central bank will implement reductions by 50 basis points in December and January, and will reduce the deposit rate to 1.5% by mid-2025,” said Jack Allen-Reynolds, the cabinet’s deputy chief economist for the euro zone.
“It is difficult to predict a substantial improvement in growth next year. consumers have been reluctant to increase their spending, despite the increase in purchasing power, and it is likely that real income will slow down next year. Furthermore, the investment plans of companies are moderate because the manufacturing sector faces major structural problems and governments are an increasingly restrictive budgetary policyeven as their economies slow. As protectionism will probably increase and the euro zone will lose competitivenessit seems unlikely that there will be a rapid recovery of the situation. exports“, summarizes the expert in a devastating paragraph of his note to clients.
At the same time, they continue to Capital Economics, the labor market weakens and wage growth slows. The unemployment rate is now at a historic low, but economists suspect that partly reflects a decline from its equilibrium level. The reality is that the vacancy rate has fallen significantly over the past two years and the proportion of businesses reporting labor shortages has declined. At the same time, surveys of companies’ hiring intentions indicate a further slowdown in labor demand in the future. “In this context, The mood at the ECB Governing Council has already darkened“, certifies Allen-Reynolds. In the end, this brutal ‘awakening’ of the ECB ten years ago makes sense.
