The ECB sees inflation landing in 2024

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By Leonidas Stergiou

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Two speeches and interviews by ECB officials days before the September 8 meeting put a brake on expectations of sharp interest rate hikes.

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The chief economist of the ECB, Philip Lane, from Spain and the Greek central banker and member of the d.s. of the ECB, Yannis Stournaras, from Austria, warned of the dangers of large and sharp interest rate increases. They were in favor of gradual changes, which is served by the ECB’s new approach which will decide on meeting-by-meeting adjustments to interest rates, avoiding giving any direction on the next move.


The new tactic, which in Frankfurt is called MBM (meeting-by-meeting), stops what the ECB started at the beginning of the year, that is to announce the next steps and even the amount of the interest rate increase, as it did in June for the July meeting.

He first announced the end of the bond buying program and then hiked interest rates in July and September. In fact, in June the head of the ECB herself, Christine Lagarde, had formulated the estimate for an interest rate increase in July of the order of 25 basis points. But the increase that was decided was twice as much. Now markets are betting on next Thursday’s decision with estimates including another rate hike of 25 to 100 basis points. This is exactly what the ECB wants to end with its new strategy, which it calls MBM (meeting-to-meeting).

And this is particularly important at the current juncture, as the ECB’s data and forecasts see strong inflationary forces, which may strengthen by the end of the year, with tapering off and landing on the 2% target in 2024.

The hunt for the “right” interest rate

“In the coming meetings, further progressive normalization of policy rates will be appropriate to converge towards the estimated equilibrium rates as we move to an approach where we decide on interest rates on a meeting-by-meeting basis,” Mr. Stournaras.

As Mr Lane explained in a speech at another conference in Barcelona on the same day, the new strategy allows for gradual changes, depending on the resistance of inflation and the level of the “ideal” interest rate.

Because of the intense volatility and uncertainty there is a lot of volatility in energy markets and prices, which moves each time the level of the interest rate that should be there to control inflation and the level of increase that needs to be decided. The aim is to close the gap between the existing interest rate and the one that should exist. The speed should be determined by factors such as the risk of recession and the financing of the economy, but also by how far behind or ahead of the yield and inflation curve the ECB will be.

Gradual interest rate increases

This technical point was made clear by Mr. Stournaras in his interview with Econostream: “I believe in the gradual normalization of policy rates, because in my opinion it would be a mistake to proceed with a very large increase in interest rates, with the risk of being forced to reverse it then start cutting rates again. A gradual approach is the only way to go.”

An overly aggressive rate hike could quickly backfire, shaking the ECB’s credibility and unnecessarily damaging the economy. But this is not the only argument in favor of a strictly “sequential steps” approach, as he said.

“When should a rise of 75 m.s.l. be decided?”

When asked about the level of the interest rate increase at next Thursday’s meeting and about the estimate for a rise of even 75 basis points, Mr. Stournaras avoided discounting the decision, but indirectly but clearly stated that he does not see the need for such a level increase.

On the contrary, he considers that such an increase risks destabilizing the GDP, which is already destabilized by very high energy prices. When asked directly what could convince him about the appropriateness of 75 basis points, Mr. Stournaras said that wage growth is for him the most critical medium-term indicator.

“If wage growth reaches levels that from an economic point of view would be undesirable, then I would say: Yes, OK, we have to act aggressively,” he said.

The “perfect inflationary storm” and the recession

Mr. Stournaras, both in his interview and in his intervention at the central bank forum in Austria, moved in the same spirit as Mr. Lane’s speech in Barcelona. Estimates converge on the existence of great uncertainty and inflationary pressures that make up the image of the “perfect inflationary storm”.

However, Mr. Stournaras, like Mr. Lane, believes that the successive jumps in inflation to higher and higher levels will soon begin to reverse. Steady deflation of inflation is imminent.

Before that, however, as Mr. Stournaras clearly stated, “the situation calls for further interest rate hikes until the neutral rate is reached, while he called on policymakers to bear in mind that the ever-thickening economic storm clouds portend at least a slowdown in economy, if not recession”. For this, as he explained, a gradual increase in interest rates is required.

Inflation falling in 2023, landing in 2024

According to the governor of the Bank of Greece, this belief is based, among other things, on the expected moderation in the rate of increase in energy and commodity prices, as well as the gradual easing of problems in supply chains.

As Mr. Lane also mentioned, according to the latest Eurosystem experts’ projections, inflation is expected to peak before the end of the year, decline gradually in 2023 and converge to the target in 2024. Similar core inflation is expected to follow the same path, according to Mr. Stournara.

Source: Capital

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