There ECB has stopped, after ten consecutive increases in the interest rates. How long can the truce last? The question, which concerns all the direct implications of fluctuations in the cost of money, obviously starting from mortgages, comes immediately after the news of the decision taken by the Council. In other times, the answer would have been sought in the words of President Christine Lagarde. Communication, so important in Mario Draghi’s time, has however lost ground compared to the past. And today it is clear that the ECB’s next moves depend on factors external to monetary policy. The first is the trend in energy prices, closely linked to what is happening in the Middle East, with the ongoing war between Hamas and Israel.
Lagarde’s communication, waiting in uncertainty
For several months now, Lagarde has made it clear that the ECB’s choices are and will be the result of a reaction. Hands free and no indications, or almost no. The decision to “keep interest rates steady does not mean that we will no longer raise them”, he says, adding that in any case the decisions “will be linked to the data”. The data therefore dictates, in particular the price trend, and, even more specifically, the energy prices command. The expression that most serves to describe the uncertainty in the Eurozone economy is the usual warning: “the risks remain on the downside”. It means that they wait for the data with the awareness that it could get worse.
The ‘remittance’ monetary policy corrects but does not guide
In essence, monetary policy renounces its guiding role, without exercising it through forward guidance, i.e. indicating a path to the financial markets. In fact, plays ‘throw-in’, intervening to correct an unwanted trend. It is not a change of approach that arises today but today it is even more evident in a scenario made more complex by the conflict and instability in the Middle East. “We believe that key ECB interest rates have reached levels that, held for a sufficiently long period, will make a substantial contribution to a timely return of inflation to our target. We will continue to follow a data-driven approach to determining the level and appropriate duration of the restriction”. It means that at this moment, today, this is the case but that tomorrow morning new data could suggest, or impose, according to interpretations, a new rate increase.
What can change, the risk of the rise in energy prices starting again
There is one fact, in particular, that is sensitive to what is happening around the conflict between Israel and Hamas, not only in Gaza but throughout the Middle East. If the war were to expand and prolong over time, there would be the conditions for a new energy crisis. And if oil and gas prices were to flare up again, the consequences for inflation would be immediate, reproducing the pattern seen with the war in Ukraine. If the reaction were the same, the ECB’s season of interest rate hikes would be facing a new beginning. (By Fabio Insenga)
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