There European Central Bank (ECB) announced the second tightening on rates in two months, but the maneuver that the president Christine Lagarde announced today and expecting a 0.75% (75 basis points) rise in the price of money to 1.25% is not the only major issue announced by the former International Monetary Fund governor at a press conference.
In fact, Lagarde said that the ECB is ready to play across the board if inflation does not remain the only source of concern in the euro area. And she also aired the prospect of activating the Transmission Protection Instrument (Tpi), the “anti-spread shield “deployed in July. The ICB of the ECB “it has been debated, unanimously approved and we are ready to use it“, Lagarde stressed. The” we are ready “is, in its own way, the “Whatever it takes” of the French economist and lawyer who became governor of Eurotower in 2019 to succeed Mario Draghi: in the face of a Europe divided on the response to be given to the energy crisis, in which the yield spreads on government bonds risk re-exploding and always appear heavier the recessive damage to the economy of the Old Continent, the Eurotower aims to show compactness.
The ECB anti-spread shield in fact, it seemed an explicit attempt to respond to a real sense of weakness in Europe. The ECB has definitively concluded the purchase exit measures already in place with the Pandemic Emergence Purchase Plan (Pepp) of 2020. It has ended up announcing the TPI as a tool for reinvesting maturing bonds bought in the Draghi era and in the pandemic challenge in countries with more tension on debt, such as Italy, whose proceeds at maturity will be reinvested and can, for the target countries, be reinvested in a substantially unlimited way (which will appeal to the financial markets and countries with high debt risk) to the emergence of unwanted and disordered market dynamics. Announcing that you are ready to use it means orienting the ICT to the role of a precautionary measure and aiming to calm speculative and unwanted movements on European markets with the leadership in market supervision even before with concrete actions. Exactly as Draghi did in 2012 and until 2015 to prepare the ground for quantitative easing.
Secondly, the ECB wants to act in this way to prevent the risks of a recession that the energy crisis can accelerate. “In the base scenario we see stagnation in the fourth quarter of 2022 and in the first quarter of 2023 but in the worst case scenario, which involves a total stop to exports of Russian gas and oil, we see a recession“, Lagarde declared at a press conference. Limited wage dynamics and reduced supplies are considered by Lagarde to be” specters “on the economy which, however, the ECB, unable to directly finance the deficits of European countries, cannot overcome. forward guidancethe government of expectations, is the move with which the Eurotower has strategically moved in recent days.
Finally, the currency data should be emphasized. Lagarde spoke of having excluded precise exchange rates for the euro for the ECB, stressing that the exchange rate with currencies such as the dollar or pound sterling has indirect effects on inflation but there are no targets “nor do we intend to set them”. for a very specific reason, the “unspoken” of Lagarde: the will of seek a bank with the United States to coordinate with the Fed the stimulus maneuvers, the rise in rates and the government of speculation prevent the Eurotower from imposing precise targets on the exchange rate which, in a phase in which the axis with Jackson Hole is fundamental, could create misunderstandings across the Atlantic. The expectation is that the cooling of inflation will strengthen the euro and therefore its purchasing power for raw materials, energy and production factors. And this is a turning point compared to the era of quantitative easing in which the stimuli were intended to explicitly favor exports to global scale. Today, the focus is more on the internal market, which is at risk from recessive threats: the ECB moves in statements to be able to control and govern the markets and not be crushed by more unpredictable trends. The success of this strategy is entrusted to Lagarde’s ability to be consistent with these objectives.
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