Lagarde, what she really said about rates and why the real question is what will happen after the summer -

Lagarde, what she really said about rates and why the real question is what will happen after the summer -

Since the European Central Bank conference in Sintra, Christine Lagarde has not launched particularly more restrictive messages than what has been known so far. After the intervention of the president of the ECB, not surprisingly, the markets did not react e yields on European government bonds remained unchanged. Therefore, even if Foreign Minister Antonio Tajani responded with a certain harshness to Sintra's speech, we are not faced with a turning point by Lagarde. Rather, there is a confirmation of the ECB's current approach, a clarification of its logic and a ray of light thrown on the confrontation underway in Frankfurt in recent weeks.

Decisions on the next hikes

Lagarde confirmed (but it was already in the prices of the financial markets) that the ECB will raise rates by a further 0.25% on 27 July next. But he hasn't said anything that suggests a decision that has already been made or even just an orientation he has matured regarding another rate hike in September, as the president of the Bundesbank is proposingJoachim Nagel. it is now clear that both inflation and the economy in general are slowing down in the euro area. For this reason, the choice of a new increase in the cost of money after the summer break is still very open. But the other big issue - Lagarde hinted - will concern the period of time during which rates will have to remain at their highest level.

Inflation at 2%

Certainly, Lagarde was not particularly conciliatory. In reverse. She stressed that the ECB will have to be persistent to do so inflation returns to 2% on time (timely, said in English). And you added that the level of interest rates must be sufficiently restrictive for as long as necessary.
the next figure on core inflation (excluding the effects of energy and food) is likely to mark a slight rise from 5.3% to 5.5%, due to some statistical effects. But the debate in the ECB is very open. To the point that the European central bankers last night in Sintra were told by the number two of the International Monetary Fund, Gita Gopinath, what she herself called three inconvenient truths.

The three inconvenient truths

Which ones are they? The first is that inflation is taking too long to return to its target - said Gopinath - therefore the ECB must insist. The second is that monetary tightening implies a risk of financial crisis, therefore central bankers could tolerate a slower return inflation targets to avoid systemic tensions. Not only that, Gopinath added that the ratification of the European Stability Mechanism would give more tools to manage possible banking crises. Finally, Gopinath's third inconvenient truth: Inflation in the future will tend to be structurally higher than it was until the pandemic. Therefore, rates will also have to adjust accordingly.
Lagarde or Antonio Tajani like it or not.

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