Inflation: a serious problem for the European Central Bank

After several months in which the European Central Bank (ECB) could seem to stop the outbreak of inflationary fever, calling it “temporary”, the ostrich has finally turned into a hawk, determined to fight inflation aggressively.

Clement Inbona, fund manager and Olivier de Berranger, CIO

Clement Inbona
Clement Inbona, fund manager

Thus, this Thursday, June 9, 2022, will be a black stone for the ECB. The Board of Governors for the voice of its president, Christine Lagarde, announced the end of the hiatus. With inflation seemingly slipping away, the ECB has firmly taken matters into its own hands, announcing both the end of its balance sheet expansion and, above all, its first interest rate hike. An unprecedented solution since 2011.

It must be said that there is an urgency because consumer prices rose by 8.1% year-on-year for the entire eurozone. Just 18 months ago they were disabled. Inflation even exceeds 15% in all Baltic countries!

First, there is urgency at key rates. The announcement of a 0.25% deposit rate hike is not trivial in substance or form, as it will come into effect at the next meeting on July 21st. Custom dictates that a rate increase is first proposed upstream and then taken into account on the D-Day of the meeting. This time, the announcement, made six weeks before kickoff, signaled a desire to regain control of its pace, but also a need for the organization to be careful not to pull back the markets and give them at least short-term visibility. The ECB is fully aware of this as it did not fail to clarify that while this measure risks stressing financial markets in the short term, it is nevertheless necessary to stabilize financial conditions in the longer term. We must first “harm” in order to alleviate later.

Olivier de Berranger
Olivier de Berranger, CIO

The urgency of buying assets then. After the ECB has weighed its balance sheet by more than 4 billion euros since the outbreak of the coronavirus, it will stop buying government bonds from 1uh next July. Thus, direct support for state funding has been discontinued; to give way to a free confrontation between supply and demand in the bond markets, risking significant increases in the cost of funding for states that are already heavily indebted to many of them.

Finally, the result is hardly encouraging, because the peak path of monetary tightening that the ECB is embarking on is both narrow and vertical. The first difficulty is on the horizon from September: the door is already open for a double 0.50% boost if inflation does not ease from the summer, which seems unlikely at this point.

If he”urgently move onnor should we go too far, risking dropping an already fragile growth into an abyss. Good luck Christina!

The information communicated is the result of internal research carried out by the management team as part of its UCI management activities and not financial analysis activities within the meaning of the rules.

This analysis is based on the best sources we have and publicly available information. They are in no way binding on La Financière de l’Echiquier and do not constitute investment advice.