In recent years, central banks have been forced to assimilate that they have to measure their words with droppers. They have become such an important player for the markets that one word too many, or one that is likely to be misunderstood, becomes a source of volatility, in fixed income and in the stock market.
For this reason, the lords of money have realized that their speech is one more tool of monetary policy, and they make use of it. Christine Lagarde, president of the European Central Bank (ECB), did so yesterday when she gave a speech in Frankfurt in which she seems to be laying the foundations for the first rate hike in the eurozone since 2011.
And not only Lagarde: Klaas Knot, the representative of the Netherlands in the central bank, has acknowledged that it is “possible” that the first ECB rate hike will arrive in the coming months. Knot has gone even further: “I cannot rule out the possibility of two rate hikes”but this will happen if “the data indicates an even greater revision of the outlook for inflation in the medium term”, he explains.
The foundations of the normalization process of European monetary policy are already well anchored. In order to avoid surprises, Lagarde has once again insisted, as she did at last week’s meeting, that the ECB already sees signs that the inflation outlook is anchoring at the institution’s medium-term target level: the 2%.
close to target
“We are seeing an improvement in the prospects for inflation in the medium term,” acknowledges the president, recalling that the foundations for higher inflation were already laid before the war in Ukraine began. “The economy has managed to put on track a greater use of resources and a stronger labor market than it was before the pandemic. The last time the eurozone had unemployment levels as low as they are now was in the 1970s. “, Explain.
And it’s not just unemployment. The ECB has understood the message that investors are giving it, and hides behind the inflation expectations that the markets set for the future to defend that its objective is getting closer to being met. “Inflation expectations have reached our 2% target, according to different indicators”he points out, and highlights how there are elements that are beginning to indicate that inflation is going to be less transitory than expected.
“The sticky inflation gauge, which picks up goods whose prices take longer than normal to react, hit 2.9% in December last year. All of this indicates that inflation is likely to stabilize at the 2% target in the medium term,” says Lagarde, something that supports his decision in December to “start reducing the debt purchase program, step by step,” a change he confirmed last week.
The war will also have an inflationary impact, which the ECB is including in its analysis. “Bottlenecks in the manufacturing sector have shown signs of improvement in recent months, but are now likely to persist in some sectors, prolonging price pressures for some goods,” he notes.
An uncertain scenario
In the current context, the ECB has considered that the most appropriate thing is to focus on fighting inflation, and leave it to fiscal policy to fight against the slowdown in growth.
However, Lagarde does not want to get her fingers caught, and insists on the uncertainty that exists at this time in the economic perspectives and in the markets: “We are aware of the risks that the war has generated, and the uncertainty that is forming in all addresses,” he explains.
“We face the eternal test of living with uncertainty, but not being paralyzed by doubts. Our response will be guided by three principles: optionality, gradualness and flexibility,” he says.
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