Finance

Watch Live: ECB's Lagarde Threads Needle Of Rate-Hikes Amid EU Defragmentation & Stagflation Forecast

Watch Live: ECB’s Lagarde Threads Needle Of Rate-Hikes Amid EU Defragmentation & Stagflation Forecast

Following The ECB’s statement, traders have moved rate-hike expectations up to around 150bps by December 2022…

All eyes will now be on what Lagarde says at the press conference as she tries to thread a needle of a fragmenting European bond market, ending bond-buying, and hiking rates into her own stagflationary forecast (lower growth and higher inflation). As Bloomberg Economics’ Geoff King points out:

“The most closely scrutinized part of the press conference will be any comments made by Lagarde on the likelihood of a 50 bp interest rate increase instead of a 25 bp move. She has published a roadmap for her preferred course of action and it’s consistent with 25 bp increases in July and September. We don’t expect her message to differ, but she’s changed tack before after inflation surpassed expectations.”

Markets were pricing in the 25 bp increase in July (and about a 40% chance of a 50bp move), and pricing in 25bps hikes for September and December as well as one each quarter thereafter until the main refinancing rate hits 1.5% (the estimate of neutral).

Watch live here (due to start at 0830ET)

*  *  *

Amid increasingly fragmented European bond markets, The ECB – as expected and well telegraphed for months – officially ended its bond-purchasing scheme and signaled lift-off on its interest rates, after eight years of NIRP (currently at -50bps).

European sovereign bond spreads are breaking out as the post-QE era begins…

Source: Bloomberg

Interestingly, given the surge in Italian yields/spreads, speaking just hours before the decision today, Lagarde’s predecessor Mario Draghi sounded a note of caution on tightening too fast.

Europe’s ‘inflation problem’ – which began long before Putin invaded Ukraine – have forced Lagarde into this corner, despite drastically slowing growth (as stagflationary threats leave central planners in a box).

Source: Bloomberg

The statement confirms that the ECB’s net buying under its asset-purchase program will conclude this month. That paves the way for Lagarde to hike rates next month, in effect keeping its long-standing promise that an end to its asset purchases will precede an increase in the benchmark deposit rate.

QE Ends July 1:

 The Governing Council decided to end net asset purchases under its asset purchase programme (APP) as of 1 July 2022. The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates and, in any case, for as long as necessary to maintain ample liquidity conditions and an appropriate monetary policy stance.

No hint at QT:

“The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time”

Forward Guidance of a 25bps hike in July:

Accordingly, and in line with the Governing Council’s policy sequencing, the Governing Council intends to raise the key ECB interest rates by 25 basis points at its July monetary policy meeting. In the meantime, the Governing Council decided to leave the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility unchanged at 0.00%, 0.25% and -0.50% respectively.

On Fragmentation (via Bloomberg):

There’s no substantive change to the part of the statement relating to what the ECB could do to counter an unwarranted widening of spreads as it pares back stimulus. It amounts to a repeat of the point that “under stressed conditions, flexibility will remain an element of monetary policy.” The key question is whether an anti-fragmentation tool – which Bloomberg reported the ECB has worked on – should be explicit or implicit. It will be interesting to see how Lagarde responds to questions on this.

Additionally The ECB revised its inflation forecast notably higher and growth forecasts significantly lower (via Newsquawk)

Eurosystem staff have revised their baseline inflation projections up significantly.

These projections indicate that inflation will remain undesirably elevated for some time.

However, moderating energy costs, the easing of supply disruptions related to the pandemic and the normalisation of monetary policy are expected to lead to a decline in inflation.

The new staff projections foresee annual inflation at 6.8% in 2022. before it is projected to decline to 3.5% in 2023 and 2.1% in 2024 – higher than in the March projections.

This means that headline inflation at the end of the projection horizon is projected to be slightly above the Governing Council’s target.

Inflation excluding energy and food is projected to average 3.3% in 2022. 2.8% in 2023 and 2 3% in 2024 – also above the March projections.

ECB cuts its 2022 growth forecast to 2.8% from 3.7% and 2023 to 2.1% from 2.8%. For 2024, it’s an upward revision to 2.1% from 1.6%.

The euro spiked ahead of the ECB decision then tumbled after only to immediately bounce back…

Read the full ECB Statement below:

High inflation is a major challenge for all of us. The Governing Council will make sure that inflation returns to its 2% target over the medium term.

In May inflation again rose significantly, mainly because of surging energy and food prices, including due to the impact of the war. But inflation pressures have broadened and intensified, with prices for many goods and services increasing strongly. Eurosystem staff have revised their baseline inflation projections up significantly. These projections indicate that inflation will remain undesirably elevated for some time. However, moderating energy costs, the easing of supply disruptions related to the pandemic and the normalisation of monetary policy are expected to lead to a decline in inflation. The new staff projections foresee annual inflation at 6.8% in 2022, before it is projected to decline to 3.5% in 2023 and 2.1% in 2024 – higher than in the March projections. This means that headline inflation at the end of the projection horizon is projected to be slightly above the Governing Council’s target. Inflation excluding energy and food is projected to average 3.3% in 2022, 2.8% in 2023 and 2.3% in 2024 – also above the March projections.

Russia’s unjustified aggression towards Ukraine continues to weigh on the economy in Europe and beyond. It is disrupting trade, is leading to shortages of materials, and is contributing to high energy and commodity prices. These factors will continue to weigh on confidence and dampen growth, especially in the near term. However, the conditions are in place for the economy to continue to grow on account of the ongoing reopening of the economy, a strong labour market, fiscal support and savings built up during the pandemic. Once current headwinds abate, economic activity is expected to pick up again. This outlook is broadly reflected in the Eurosystem staff projections, which foresee annual real GDP growth at 2.8% in 2022, 2.1% in 2023 and 2.1% in 2024. Compared with the March projections, the outlook has been revised down significantly for 2022 and 2023, while for 2024 it has been revised up.

On the basis of its updated assessment, the Governing Council decided to take further steps in normalising its monetary policy. Throughout this process, the Governing Council will maintain optionality, data-dependence, gradualism and flexibility in the conduct of monetary policy.

Asset purchase programme (APP) and pandemic emergency purchase programme (PEPP)

The Governing Council decided to end net asset purchases under its asset purchase programme (APP) as of 1 July 2022. The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates and, in any case, for as long as necessary to maintain ample liquidity conditions and an appropriate monetary policy stance.

As concerns the pandemic emergency purchase programme (PEPP), the Governing Council intends to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.

In the event of renewed market fragmentation related to the pandemic, PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions at any time. This could include purchasing bonds issued by the Hellenic Republic over and above rollovers of redemptions in order to avoid an interruption of purchases in that jurisdiction, which could impair the transmission of monetary policy to the Greek economy while it is still recovering from the fallout from the pandemic. Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic.

Key ECB interest rates

The Governing Council undertook a careful review of the conditions which, according to its forward guidance, should be satisfied before it starts raising the key ECB interest rates. As a result of this assessment, the Governing Council concluded that those conditions have been satisfied.

Accordingly, and in line with the Governing Council’s policy sequencing, the Governing Council intends to raise the key ECB interest rates by 25 basis points at its July monetary policy meeting. In the meantime, the Governing Council decided to leave the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility unchanged at 0.00%, 0.25% and -0.50% respectively.

Looking further ahead, the Governing Council expects to raise the key ECB interest rates again in September. The calibration of this rate increase will depend on the updated medium-term inflation outlook. If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.

Beyond September, based on its current assessment, the Governing Council anticipates that a gradual but sustained path of further increases in interest rates will be appropriate. In line with the Governing Council’s commitment to its 2% medium-term target, the pace at which the Governing Council adjusts its monetary policy will depend on the incoming data and how it assesses inflation to develop in the medium term.

Refinancing operations

The Governing Council will continue to monitor bank funding conditions and ensure that the maturing of operations under the third series of targeted longer-term refinancing operations (TLTRO III) does not hamper the smooth transmission of its monetary policy. The Governing Council will also regularly assess how targeted lending operations are contributing to its monetary policy stance. As announced previously, the special conditions applicable under TLTRO III will end on 23 June 2022.

***

The Governing Council stands ready to adjust all of its instruments, incorporating flexibility if warranted, to ensure that inflation stabilises at its 2% target over the medium term. The pandemic has shown that, under stressed conditions, flexibility in the design and conduct of asset purchases has helped to counter the impaired transmission of monetary policy and made the Governing Council’s efforts to achieve its goal more effective. Within the ECB’s mandate, under stressed conditions, flexibility will remain an element of monetary policy whenever threats to monetary policy transmission jeopardise the attainment of price stability.

And here is the Redline…

Tyler Durden
Thu, 06/09/2022 – 08:23

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