Lagarde warns that recovery is losing steam due to supply shortages

Christine Lagarde, president of the European Central Bank, has acknowledged that the economic recovery is losing momentum in the face of supply shortages and the lack of certain types of workers in some sectors. The recovery remains strong, but activity is “losing momentum” and “inflation continues to rise (it has not peaked), although it will moderate later.”

“The euro area economy continues to recover strongly, although momentum has moderated somewhat. the shortage of materials, equipment and labor is holding back production in some sectors, “Christine Lagarde asserted. This is a global phenomenon that is also generating problems and longer delivery times (of goods) in other parts of the world. For example, the economic recovery in the US has also started to slow down.

In addition, the French banker has recognized that the rise in de electricity and energy they could generally take away purchasing power from consumers, which in turn can erode consumption and economic recovery. Both sides (supply and demand) face challenges in the short term. However, in the medium and long term these risks should disappear.

Inflation has not peaked

For now, Lagarde has acknowledged that inflation will continue to rise in the short term, although she expects some relief throughout 2022. The president of the ECB has blamed energy for the rise, but also to the improvement in domestic demand. However, he has acknowledged that “a phase of higher inflation than previously believed is expected … if the bottlenecks are transferred to higher wages, inflation may remain high for longer.”

But the gala has once again insisted that the base scenario (the most likely scenario) inflationary pressures are “transitory”, although they last longer than expected and are stronger than was initially believed. In Spain, inflation in October has climbed to the highs of 1992 and in Germany at 1993 highs.

“The bottlenecks will ease as demand and supply reach a new breakeven point. The point is, this will take a little longer than we originally anticipated, until more freighters are available, until that the organization in the ports improves, these improvements will be gradual and will take much of 2022“, has recognized Lagarde.

To end the price debate, the banker has wanted to rule out a stagflationist scenario. “To suffer stagflation you have to suffer stagnation economic, and for now there are no symptoms of economic stagnation on our horizon, so inflation is a concern, but we do not foresee a period of stagflation “, explained Lagarde.

Maintains debt types and purchases

As for the technical part, no surprises from Frankfurt. The ECB has not moved a tab in the penultimate meeting of the year despite the fact that inflation continues to advance unstoppably in the euro zone. The monetary institution leaves the main interest rate (charged to banks in weekly auctions) is at 0%, the rate on the ease of deposit (the one that banks are charged to park their money in the Eurosystem) is at -0.5% and the credit facility (the one charged to banks that need urgent liquidity from the ECB) at 0.25%.

The bond purchase program also remains intact. The ECB has again insisted that net asset purchases under the pandemic emergency program (PEPP) it will be slightly lower than in the second and third quarters of this year, as already announced at the September meeting. However, the French banker has once again insisted that this program will end in March 2022. On the other hand, the conventional APP program will continue to buy bonds at a rate of 20,000 million per month.

The president has paved the way for the next meetings to take a decision on the PEPP. Purchases “will have a more moderate pace below the emergency program compared to the second and third quarters,” he explained. In the previous bond interest rally, the ECB increased the level of purchases. According to Lagarde, the scene has changed. “Market interest rates have increased since our last meeting in early September, but overall financing conditions remain favorable today.” The reason to look for it is that in March inflation had not yet shown its fierceness. Right now the rise in prices favors real interest rates to decline, despite the rise in bond yields.

The ECB maintains its roadmap despite the fact that inflation is far exceeding the 2% target (it is at 3.4%) and that expectations speak of prices that could remain persistently high. However, the central bank insists that the reality is different: inflation is temporary.

Expectations on the rise

Long-term inflation expectations have exceeded 2% in the euro zone, which would be precisely consistent with the objective of the European Central Bank, which is to bring the general CPI to this rate of change on a sustained basis. The problem is that the trend is clear and only shows one direction: up. Headline CPI stands at 3.4% in the euro zone and is forecast to reach 4% this year, which could continue to fuel inflation expectations in the euro zone.

From ING they believe that “higher energy prices and a weaker euro exchange rate than the latest macroeconomic projections will also give the ECB headaches.” All of this increases the pressure on a central bank that plans to keep rates at minimums for years. Now, “the markets have even started betting on a first rate hike by the ECB as early as 2022, two years before what we and the market consensus predict “, assures Rakau.

For her part, the President of the ECB explained at a press conference that although attention is paid to these synthetic indicators and they are taken into account (within the ECB), the ECB’s roadmap it does not have to be the same as the markets ‘predict’. These statements suggest that interest rates will remain low for a long time in the euro zone.