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The ECB opted for a greater rise in rates but Lane tempered the spirits

Date: March 29, 2024 Time: 06:09:17

The European Central Bank (ECB) was about to be even more aggressive with interest rates at the meeting on December 15, but ‘in extremis’ the institution’s chief economist, Philip Lane, brought together support to be more restrained, as reflected in the minutes of the meeting in which rates were raised by half a point (50 basis points) and the start of the reduction of the debt portfolio was announced as of March. But that was not the initial position of the council chaired by Christine Lagarde.

“A large number of members earlier expressed their preference for raising key ECB interest rates by 75 basis points, as inflation was clearly expected to be too high for too long and both expectations and forecast conditions were clearly inconsistent with a timely return to the 2% inflation target,” the document states.

The ultra-aggressive position within the ECB was based on the idea that “the failure to exceed market expectations” had given investors arguments that it would not be able to raise rates due to the recession, “which could result in the yield curve not shifting up to the extent necessary to bring inflation back to target.” For this reason, the focus of the meeting called for another increase of similar to that of the previous meeting (75 bp) in order “not to send the wrong message and to counteract an unwarranted easing” of financial conditions and the stance of monetary policy.

Philip Lane, Chief Economist at the ECB. Europe Press

Lane’s solution and Lagarde’s unexpected aggressiveness

Of course, the ECB’s ultra-aggressive stance did not pan out in the face of rejection by another bloc of governors and Lane’s recommendations. The bank’s chief economist was again key in decision-making. The Irishman assured that the transmission of the tightening of the monetary policy (200 basis points since July) was progressing the evolution of the credit in line with what the rest had happened in the past and emphasized that, in previous adjustment cycles, the banks have the structure prices “by increasing their rates more strongly.

On the other hand, the ECB stressed that the Governing Council would simultaneously announce the start of a reduction in reinvestments of maturing securities in the APP debt portfolio and that the ongoing redemptions of the TLTRO (injections of liquidity to banks ) were also contributing to an accelerated reduction in the size of the Eurosystem’s balance sheet. “While such a move was in line with market expectations, indications for financial markets were uncertain. financial market,” the ECB report observed.

The lack of visibility about the consequences of the cumulative rise in interest rates in the euro zone since July caused some members of the ECB to get off the 75 basis point bandwagon and express their willingness to support Lane’s final recommendation to raise them in 50 basis points (half a point) and launch a “strengthened communication on the Governing Council’s political intentions and the enhanced message that it would continue to raise rates significantly at a sustained pace.”

This second part explains that Lagarde was more aggressive than expected at the press conference on December 15, repeating several times that the ECB was going to raise rates several more. In fact, this same Thursday from Davos, the president of the ECB has once again insisted on that message, assuring that inflation is too high despite the step back in December to 9.2% and drops that the central bank is considering raising in , at least, 100 basic points more, at 3.5%, the official rates. The Dutch governor, Klaas Knot, endorsed that French position as: “It will not be valid after a single increase of 50 basis points, that’s for sure.”

* This website provides news content gathered from various internet sources. It is crucial to understand that we are not responsible for the accuracy, completeness, or reliability of the information presented Read More

Puck Henry
Puck Henry
Puck Henry is an editor for ePrimefeed covering all types of news.
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