The European Central Bank (ECB) has a serious credibility problem. The transmission of their messages to the markets is not as fluid and clear as it should be, perhaps because some governors speak more than necessary, as has been demonstrated again this week, in which investors have had one version and the opposite on their screens within hours. Raising interest rates by 50 basis points “several times” is not the same as doing it once and seeing it come. If on Tuesday we woke up with the news of a rise in rates of only a quarter of a point for March, as published by Bloomberg ‘off the record’, citing members of the council, on Thursday the ‘aggressive’ chants were reproduced ‘on the record’ from Davos.
Governor Klaus Knot (Netherlands) said markets were undervaluing moves by the ECB led by Christine Lagarde of France with a blunt speech: “It won’t be due after a single 50 basis point increase, that’s for sure.” Immediately afterwards, François de Villeroy (France) assured that the “orientation” that was given on December 15 -several increases of 50 points- was correct. And finally, the lagarde herself insisted on the same thing and that inflation was too high. All this seasoned with the publication of the minutes of the last ECB meeting in which the agreement to transmit a “reinforced communication” of the determination to impose the financial conditions was collected.
The truth is that both of them are talking too much about it with the intention, don’t forget, to influence the price curve until the next monetary policy meeting arrives. The ECB has multiple personalities and this is disconcerting the markets that do not believe what it says, as reflected in the prices of bonds, shares and wholesale financing represented by the Euribor. If the 100 basis point rate hike guidance holds true, that would put policy rates at 3.5% in less than seven weeks. If the reduction of the balance is a priority as of March, as the minutes reflect, the yields of the public debt would not move in the current range. For example, the interest on the Spanish 10-year bond was below 2.9% on Wednesday.
From here two things can happen and neither of them is desirable. The first is that the market is wrong in its perception of what central banks are going to do. Something similar happens with Jerome Powell’s Federal Reserve but to a lesser extent. In this case, you already know what is going to happen: the adjustment will take place hard and forcefully after the decisions and comments made after the Fed (February 1) and ECB (February 2) meetings. In those 24 hours within 10 days, the guardians of the dollar and the euro must ratify their words with deeds. His commitment to continue raising rates above 5%, in the case of the US, or 3.5% in the euro zone, are not even remotely discounted among investors.
The second hypothetical scenario is one in which the markets are right and the central banks raise their cards while bluffing. In other words, Lagarde confirms another rate hike as in December (half a point, up to 3%) but expectations for March are lowered, the balance sheet reduction debate is postponed and the ECB’s official opinion is established that the Sufficient financial conditions have already reached the restrictive degree to appease inflation. What would justify such a change of opinion? Few arguments and none good. The recession, the war in Ukraine or the shadow of delinquency that begins to knock on the doors of bank branches. Actually, everyone would understand that the governors have given a new kick to the credibility of the ECB, damaged since in 2020 it sowed much of the current inflation.
