US inflation, because if it continues to fall, the ECB and the Fed want to raise rates?

The paths are parallel, in terms of rate hikes. But they are also divergent, given that on one side of the Atlantic inflation continues to fall, to a 14-month low, and on the other it remains high. The answer, however, remains the same. European Central Bank and Federal Reserve confirm that new tightening on the cost of money will come. The worst situation is in the Eurozone, where price level estimates have been revised upwards compared to September. Also with regard to the “Core” rate, excluding energy and food. Furthermore, the risks of financial instability are greater for the euro area. And it is for this reason that the president of the ECB Christine Lagarde continues to support the line of Germany, the Netherlands and the Baltics.

If Washington sees rosy, Frankfurt sees black. Price flare-ups remain the main theme for central bankers. In its economic bulletin, the ECB worsens its estimates for 2022, going from 8.1% in September to 8.4%. An increase also for 2023, from 5.5% to 6.3%, and for 2024, from 2.3% to 3.4%. The worst data, and which will be crucial for the ECB’s next decisions, concerns inflation net of the energy and food component, which should average 3.9% in 2022, to then rise to 4.2% in 2023 and then fall to 2.8% in 2024 and 2.4% in 2025. This is why we must expect, the bulletin clearly and substantially explains, other rate increases after that of 15 December, the fourth applied during the past year. Specifically, the Governing Council believes “that interest rates will still have to increase significantly and at a sustained pace to reach sufficiently restrictive levels to ensure a timely return of inflation to the medium-term objective of 2%”. According to the ECB, keeping interest rates at restrictive levels “will reduce inflation over time by curbing demand and will also protect against the risk of a persistent upward shift in expectations (on prices, ed.)”. However, future rate decisions “will continue to be data-dependent and will follow a meeting-by-meeting approach.” As anticipated by Lagarde since last July, the month of the first increase.

Frankfurt’s choices are given by uncertainty, considered “exceptional”, and by the recession, considered “mild”. The 250 basis points of rate hikes, according to the line outlined by board member Isabel Schnabel, are not having an impact on the real economy, and therefore we can continue to counter prices. That, at least for the first part of the year, is the priority. In the event of positive surprises, there will be a recalibration, but analysts’ forecasts call for a further rise by 50 basis points for the February and March meetings, to then arrive in May with a double choice. Either another half point, as the Northern front is asking, or a less aggressive approach.

The next decisions will also be determined by the data on the reduction of the budget, announced by Lagarde in the December meeting. The bulletin confirmed that from March the portfolio of bonds purchased over the years with the Asset Purchase Program (APP) “will be reduced at a measured and predictable pace” equal, on average, to 15 billion euros per month until the end of the second quarter of 2023 and which will then be determined over time. As expected, the June meeting will be on fire.

In the middle of the year, Frankfurt will have to deal with the moves of the Fed. Which will continue with rate hikes, but which could reduce them in size, as pointed out by Goldman Sachs and Pimco. This option was driven by new data: on an annual basis, inflation in the US slowed down again in December, ending at +6.5% from +7.1% in November. Best read in 14 months. Jerome Powell’s Fed, however, seems intent on fading further. Not surprisingly, the head of JP Morgan, Jamie Dimon, believes that to curb the flare-up in prices, the Fed must reach a rate of 6%. Moves that will also have an impact on the ECB