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at the ECB, the “hawks” Olli Rehn (Finland) and Villeroy de Galhau (France) give a voice

At the ECB there is uncertainty over the issue of rate hikes and eventually we will get used to this air ballet between “pigeons” and “hawks” (the “pigeons” favorable to broad support from the economy still dominate the clan of “hawks” who are supporters of a more restrictive competition).

Thereby, Saturday Christine Lagarde was worried of the risk of stagflation in the eurozone, but she, who wants to be “neither dove nor hawk”, kept quiet about a possible and imminent monetary policy tightening led by the European institution based in Frankfurt, Germany.

She spoke the day after an interview for the Italian daily La Stampa by Fabio Panettamember of the executive board of the ECB, in which whoever chooses the “pigeons” said that the context of slow growth and rising prices “makes choices more difficult” guardians of the euro, because monetary tightening aimed at limiting inflation would ultimately slow down already weakened growth

For Olli Rehn, we need to prevent inflation from hitting and consolidating

But since then, it seems that the hawks are launching a real offensive in the corridors of the European Central Bank. After Governor Villeroy de Gallau, last Friday, it’s the turn Finnish Olli Rehn to give voice. This Monday morning, the German press also called for the European Central Bank (ECB) to raise interest rates “quickly”: from July, when the eurozone is subject to high inflation.

“We must avoid hardening inflation expectations,” said this member of the Governing Council of the ECB in an interview with Die Welt, referring in particular to the Russian invasion of Ukraine.

“It is therefore important to give a signal in this direction. It is appropriate to raise the key rate in the third quarter, probably in July,” he added.

In the interview given to the Finnish daily newspaper on May 5 Helsingin Sanomat, the Finn explained:

“I think it would be justified to raise the deposit rate by 0.25 percentage point in July and bring it to zero in the fall. Then normalization [du resserrement] monetary policy could be pursued gradually and proactively. †

According to the member of the Governing Council of the ECB, inflation “affects people’s psychology” through anticipatory reactions to the consequences of inflation, and therefore it should be stabilized, through the normalization of monetary policy.

Virtually no wage increases in the Eurozone, unlike the United States

However, Olli Rehn believes that the inflation outlook in the eurozone is very different from that in the United States, where the economy has overheated and inflation rose to 8.5% in March.

“Wage increases in the United States averaged 6%. The recovery continues in the eurozone, but the labor market did not recover so quickly and wage increases barely exceeded 2%he explains to the Helsingin Sanomat

And why such a difference? According to the ECB executive, the eurozone economy is suffering more from the Russian invasion war than the US economy:

“This implies a decrease in wage pressures in the eurozone. The need to raise interest rates would also be less,” said Olli Rehn, giving a few points to the “pigeon” camp …

But according to analysts, this situation will not last: the sharp rise in consumer prices will cause workers to demand relatively large wage increases. As a result, companies will have to pass on rising labor costs in the prices of the goods and services they sell, which will exacerbate inflation.

Inflation and war in Ukraine: the great caution of the guards of the euro

Indeed, inflation has already risen very high in the eurozone, reaching a historic one-year level of 7.4% in March. well above the ECB’s medium-term target of 2%.

This is the whole debate between “hawks” and “pigeons”, this situation should prompt the ECB to raise its rates, just like the other major central banks, and yet the euro’s guardians are doing everything they can to make their decision-making slow down as the situation in Ukraine creates uncertainties for the foreseeable future. The lack of insight into Vladimir Putin’s intentions forces them to be extremely cautious.

An interest rate hike, the first since 2011 will be an important step in the ongoing process of normalization of accommodative monetary policies conducted in response to crises, especially those related to covid-19 from 2020 onwards.

Inflation, Ukraine: Bank of England raises interest rate to 1% after Fed, ECB under pressure

Villeroy de Galhau calls for at least three rate hikes in 2022

Last Friday, François Villeroy de Galhau, the head of France’s central bank, said he was in favor of cutting the deposit rate by the end of 2022. These comments indicate that this member of the Council of Governors of the ECB is in favor of at least three rate hikes by 2022.

The ECB has started to reduce its exceptional support to the economy, but the record level of the consumer price index and the rise in long-term inflation expectations are forcing more and more members of the ECB to push for a faster end to unconventional monetary policy recommend instruments.

The ECB should initially cease bond purchases at the end of June and then raise its deposit rate at “next” monetary policy meetings, François Villeroy de Galhau said, without specifying a date for the start of the rate hike.

The “pigeons” begin to be convinced by the “hawks”

Some ECB members have recently called for a rate hike in July, meeting little opposition from the institution’s ‘pigeons’, suggesting that a rate hike this summer was now the option.

“I’d rather put the marker a little further: barring any new unforeseen shocks, I would think it’s reasonable to have positive ground by the end of the year,” the Banque de France governor said at a conference hosted in Paris. .

A return to the positive deposit rate zone, currently at -0.5%, would mean: minus three-quarters rate hikes by year-end† The European Central Bank would then have to gradually raise its nominal interest rate to a “neutral” level, ie between 1% and 2%, François Villeroy de Galhau added.

Inflation levels are the main justification for rate hikes, with recent surveys suggesting that inflation expectations are “less and less” anchored around the ECB’s 2% target.

Keep inflation around 2%: the ECB and the Banque de France “will do what it takes” (Villeroy de Galhau)

Rate hikes could also support the euro against the dollar, with the weakness of the single currency favoring imported inflation.

“The level of the euro is of great importance for imported inflation,” said François Villeroy de Galhau. “A euro that is too weak would run counter to our objective of price stability.”

Another point highlighted by the camp of the hawks is the statement by Isabel Schnabel, leading member of the ECB’s Governing Council, in the German economic press last Tuesday.

“In my opinion, a rate increase is possible in July. †

Ultimately, proponents of a swift end to emergency measures and a normalization of the ECB’s monetary policy score points, but fears of a serious economic policy flaw persist, hence this caution, which may sound like a waltz of hesitation .

(with AFP and Reuters)