Citi: ‘Sees’ ECB interest rate hike on July 21st

Her Eleftherias Kourtali

The ECB reaffirmed its intention to close its net asset markets in the third quarter, with a much greater emphasis on the risk of changing inflation expectations than on downward growth risks, and “eliminated” from the announcement that The normalization of the policy can be postponed if the outlook worsens, as Citigroup points out. All of this, he points out, suggests that asset markets are more likely to end early than at the end of the third quarter, with a first rate hike in September and possibly even July.

More specifically, as the US bank notes, the Governing Council of the ECB did not take any decision at its April meeting (which was described by Lagarde as an interim meeting), leaving the actual decisions on the expiration date of the net asset purchases to next meeting on 9 June, when new forecasts from ECB staff can be used to explain these decisions. Citi, however, notes a significant “shift” in the ECB’s communication towards a slight acceleration of the normalization process. The council not only boosted its expectations that the APP should be terminated in the third quarter, but removed from its policy statement a reference to the revision of this timetable in the event of a worsening outlook.

Citi thus comes to the provisional conclusion that the balance of views on the board is moving towards further accelerating the normalization process, effectively opening the door to a first interest rate hike on July 21st. This would only require the completion of asset purchases in the first half of that month, according to Lagarde’s repeated statement that the gap between the end of purchases and the first interest rate hike could be from a week (or up to several months). ).

One of the most interesting findings was, in Citi’s view, the significant emphasis on the risk of changing inflation expectations and the almost complete absence of concerns about a slowdown in domestic demand. The first remains, in her view, hypothetical. The latter seems quite certain, given the contraction in real income caused by the external shock of inflation.

The reason why Citi emphasizes this asymmetry is not only because it demonstrates a more aggressive attitude in the way the board handles incoming data, but also because it raises the question of what is the intended effect of predictable moves. policy and therefore how far policy normalization can go.

The channels of transmission of conventional policy (bond yields) and non-conventional policy (asset purchases) for private and public demand are direct, Citi points out. The transmission of policy decisions to inflation expectations is much more difficult to determine, and the central bank assumes that household and business expectations are dampened simply because it exhibits strength.

This is doubtful, however, according to Citi, as expectations are likely to reflect current inflationary behavior. Therefore, it seems that the board, emphasizing the risk of changing inflation expectations without explaining how monetary policy affects these expectations, takes a rather political stance, which is first to normalize to show that it is willing to act. , rather than because this action will be effective. This suggests that short-term normalization is not sensitive to growth and real demand data and is essentially guided, both in terms of timing and extent, by short-term inflation developments, Citi points out.

Finally, Citi doubts that the ECB will use a new tool in the near future. He doubts that Lagarde’s commitment to using flexibility as a means of ensuring the transmission of monetary policy across the euro area will have immediate consequences. Lagarde clarified that there is no new tool or program on the table at the moment, but it could always be introduced in a short time if needed.

“We think this reflects a generally supportive view across the board about the benefits of such an instrument. But without a clear explanation of why controlling government bond spreads affects the dynamics of inflation – a narrative that in view would require recognition of the role of fiscal policy in both supporting demand and slowing down final energy price increases – we suspect that any new instruments will be implemented – as in the case of SMP, OMT and PEPP – reactively. and not precautionarily, and only in quite extreme cases “, Citi explains.