The European Central Bank is preparing to make one of the most difficult choices ever, even more so than that of 21 July, when it raised interest rates for the first time in eleven years, putting an end to the era of negative rates. Two months ago, he had little choice: to fight runaway inflation he could only act with determination before the recession, now on the horizon, closed the window to act. The increase from 50 points, higher than expected, also served to convince the hawks to give life to the anti-spread shield, launched unanimously. Now, hawks and doves are far away and without trading commodities. The first more determined, even in public, so much so that markets and analysts bet that the rise will be ‘jumbo’, ie from 75 points. But the latter are ready to do battle during tomorrow’s board meeting, which will necessarily have to find a compromise in order not to weaken the final decision.
However, the context in which the decision will be taken also sees the Fed continue its strategy of hikes “for as long as it will be necessary”. The vice president of the US central bank Lael Brainard reiterated that US growth is at a modest pace, as is employment, while prices continue to rise, which in some districts grow substantially.
The ECB will also start from the data. The latest economic statistics, updated in August, will be on the table of the 19 national members plus the 6 of the board of directors. They will not only give a picture of the situation, useful for understanding the dynamics of the cycle, but will also be a first verification of the move in July. On inflation, the real enemy to beat, the news will be bad: in August it reached a new record of 9.1%, in the Baltic countries it has traveled above 20% for months, it has exceeded the double digit in the Netherlands, Spain and others , and Germany will get there in December. The forecast made in July by the staff for 2022 (6.8%) will therefore be heavily revised, strengthening the convictions of those who believe that a heavy squeeze is necessary, by at least 75 points tomorrow and at least 50 in October.
The hypothesis scares many, not just the doves on the board.
Even some analysts believe it may be risky to move too much when one is on the precipice of recession. The risk is to repeat what is now considered by all to be the mistake of Trichet, the president of the ECB who in 2011 raised rates twice just when the crisis in the euro zone was worsening, condemning the economies that grew less, that is, those Piigs already struggling with high debt. But today’s situation is much more uncertain than that of the sovereign debt crisis, when spreads were a thermometer for countries’ reliability. Even now, government bond yields are on the rise, even now some are trying to make bearish bets against the euro, but euro zone countries have shown great resilience and resilience in the face of unpredictable crises such as the pandemic.
The euro area is better equipped against shocks, and not too dramatic signals are arriving on GDP. The growth of Euroland, in the second quarter of 2022, rose by 0.8% compared to the first three months of the year. The ECB itself had expected worse numbers in its June forecast (just 0.2%). And also on employment, another figure that will guide the decisions of Frankfurt, Eurostat does not yet report slowdowns, on the contrary in the second quarter it rises by 0.4%, (and in Italy by 1.2%).
Of course, these are not data that exclude the recession that, according to the CEO of Unicredit, Andrea Orcel, “everyone expects”, and the real issue is to understand “how deep it will be”. The worst possible scenario, namely Russia closing the gas taps, has materialized. Industrial production, which had already fallen in Italy for two months, is now starting to decline in Germany as well. Prices are running, bills are rising and consumption is slowing down. The alert is high, and in the board meeting the doves will ask to proceed with caution, with constant increases as indicated by the chief economist Philip Lane. But it may be too late to contain the hawks: after the messages of the last few weeks, the markets have already acquired a 75-point rise. Falling to 50 would strongly signal the risk of an imminent recession.
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