Summer is usually a time of relaxation in the markets. Trading volumes drop, stupor grows, and many decisions are postponed to September. Christine Lagarde, president of the European Central Bank, does not seem willing, however, to give investors a break. If last week they had to interpret the change in the entity’s inflation target, now set at a symmetric 2% target —that is, it considers deviations below and above that percentage as negative. the next one will give clues about the future orientation of monetary policy, as advanced this Monday in an interview with Bloomberg Television.
The meeting of July 22, until now conceived as a rather irrelevant face-to-face, thus happens to capture all eyes. Especially after Lagarde promised “interesting changes” and described it as an “important meeting” in which changes will begin to be seen in the way the ECB communicates. Lagarde said in the interview that he expects the ECB’s bond purchase plan, valued at 1.85 trillion euros, to run until at least March 2022. So far, nothing new, but added that this emergency acquisition program Against the Pandemic (PEPP) will be followed by a “transition to a new format”, an expression as imprecise as it is encouraging that a new and relevant announcement is yet to come. The vice president of the ECB, Luis de Guindos, backed this feeling that there will be imminent movements in an event organized this Monday by OMFIF (the Official Monetary and Financial Institutions Forum). He said the Governing Council will decide soon on the transition from pandemic debt purchases to other bond purchase programs.
Analysts and investors have been speculating for months about what will happen when the PEPP ends, the jewel in the crown of the tools deployed in this crisis. When it came to redefining its asset acquisition policy, everything relied on three factors: the performance of the economy, now embarking on a sinking recovery due to the presence of the delta variant, the evolution of inflation, which the ECB expects to rise that it is temporary, and the game of internal balances between hawks and doves.
The biggest fear is that a too hasty withdrawal of stimuli will cause a rout in the markets and an increase in the interest rates paid by States on their debt. But once the inflation target is relaxed – 2% ceases to act as a ceiling to be an aspiration – experts believe there is scope to launch new stimuli without betraying their mandate. Carsten Brzeski, strategist macro boss of ING, believes that the current orientation of monetary policy is “clearly insufficient” to reach the 2% inflation target if one takes into account that the bank’s forecasts suggest that prices will be at 1.4% in 2023 .
The continuation of the expansionary policy beyond what was expected, together with the decision of the United States to advance its first interest rate hike a few months – now scheduled for the end of 2023 – could cause further falls in the euro, which has lost one 2.5% against the greenback in the last month and is exchanged for 1.18 dollars. The reversal is a relief for European exporters, who in recent months have seen the single currency strengthen, and it is still 5% more expensive than a year ago, which makes their products less competitive.