Schena (Symphonia): “The ECB has no incentive to slow down the pace of the tightening, we expect new rate hikes”

TURIN. Next week the European Central Bank (ECB) is called to give answers to investors and savers. A further rise in interest rates by 50 basis points is expected, but expectations are growing for the new macroeconomic data. Which could be better than expected for seasonal reasons. We will see. But in the meantime the long-distance debate between the more prudent central bankers, such as the governor of the Bank of Italy, Ignazio Visco, and the more aggressive ones, such as the northern front, has taken hold. In the middle, Frankfurt’s number one, Christine Lagarde, who for now listens more to the more intransigent side than the other. And according to Massimiliano Schena, investment director of the financial boutique Symphonia Sgr, the Governing Council of the ECB has little incentive to reduce the pace of normalisation. Easy, he explains, to expect new increases in the cost of money at least until mid-year.

Many governors of the Eurosystem call for caution, Lagarde confirms the mantra and says she will do everything to fight inflation. Who is right?
“With economic activity more resilient than expected to multiple shocks over the past year such as monetary tightening and the energy crisis, and with the positive effects of China’s post-pandemic reopening starting to show, inflation is proving to be more persistent than expected. expected. February’s preliminary reading came in better than expected and, crucially, core inflation has not yet passed its peak. Furthermore, the ECB is certainly reassured of the fact that the spreads of government bonds of peripheral countries are not suffering from the recent market turbulence”.

What to expect from next week’s meeting?
«President Lagarde confirmed the indication of the last meeting, in which a 50 basis point rise in the reference rates had been announced at the March meeting. In the current macroeconomic scenario, the ECB has few incentives to reduce the pace of rate hikes from 50 to 25 bp and the risk is that rates could rise by another 50 bp also in May».

Is there a risk of a spiral between prices and wages, as Visco suggests?
«The risk is always present, especially if the European economy continues to resist the prophecies of recession; after all, the European inflationary process is more backward than in the USA and the imminent wage renegotiations could reflect last year’s sharp rise in prices».

Was the bull run too fast?
«Theoretically, the ECB is in a more backward phase of monetary tightening than the USA, but some elements must be considered. First, Frankfurt seems reluctant to be too restrictive with respect to the Fed, which could limit the pace of hikes in the coming months. Secondly, the ECB will have to take into account the potential problems for financial stability, particularly in the real estate market and in the public debt of peripheral countries, also because the TPI (the Transmission Protection Instrument, the anti-spread shield) has not yet been tested . Finally, the maximum negative impact on the economy of the monetary tightening of recent months in the Eurozone has yet to manifest itself».

Chapter uncertainty: according to many governors it is high, according to Lagarde not so much as to induce a slowdown in the tightening. Yet it seems like a huge question mark. How could it change the course of monetary policy?
“The ratio of risk factors remains tilted to the downside for the Eurozone economy. Apart from the fading of some shocks (in particular the energy crisis), the resilience of the economy could be supported by temporary post-pandemic effects (such as the disposal of corporate order books). Moreover, the maximum negative impact of the monetary tightening since July is in all likelihood yet to materialise. Furthermore, if the short-term risk of a US recession is significantly reduced, it has not completely disappeared, especially for the second half of the year, with potential negative implications in Europe. Finally, geopolitical risk may again increase with the intensification of field operations in Ukraine or the deterioration of US-China relations. For this reason, the ECB could become more cautious in the second half and play the card of reducing the rate of hikes from 50 to 25 basis points”.