- European Central Bank, the most dovish of all the major central banks and which had pledged to maintain rates for this year show signs of wavering in its conviction, against a backdrop of high inflation across the Eurozone
- ECB may ultimately still have its hands tied because inflation has not been consistent across the Eurozone, and the implicit guarantee of the ECB to buy bonds of its straggling southern European regions is already seeing a mass selloff in these sovereign debt instruments
“You turn if you want to, the lady’s not for turning.”
– Margaret Thatcher, United Kingdom Prime Minister (1979-1990)
While her colleagues at other major central banks from the Bank of England to the U.S. Federal Reserve had all made their hawkish pivot, European Central Bank chief Christine Lagarde kept her steely resolve to ensure the liquidity taps flowed.
The challenge for Lagarde and one not faced by her counterparts, is that the Eurozone represents different national economies at various stages of development for which the euro is used to anchor them all.
Recovery from the pandemic has also not been consistent across the region, with some areas rebounding faster and better, while others have lagged and against this backdrop of disparate fortunes, each country also issues their own sovereign debt.
Tightening monetary policy by the ECB is not an exercise for the faint of heart, which is why Lagarde has for the longest time preferred to err on the side of caution.
But with Eurozone inflation now tipping the scales at 5.1%, there is increasing pressure on the most dovish of central banks to finally do something to reign in inflation before it starts to get out of hand.
The Bank of England has been the first to move this week, raising rates for a second time, to 0.5%, on expectations that inflation will accelerate to above 7% within months.
Although the ECB has not followed suit, keeping its key interest rates unchanged, President Christine Lagarde has changed her tact, leaving the door open to an interest rate increase later this year, a turnabout from her position seven weeks ago.
Perhaps the lady is for turning after all.
Whether it’s peer pressure from the other major central banks or that annual inflation in the Eurozone is now more than double the ECB’s target, there is increasing pressure on Lagarde and her colleagues who had intended to keep rates on hold throughout this year.
That prospect has already seen a flurry of selling in European government bonds, especially those of southern European countries who were already reliant on the ECB to soak up their sovereign debt.
Yields on some of the Eurozone’s weakest members economically soared, while the euro strengthened against the dollar.
But all is not well in the “state” of Europe, with economic growth slowing sharply towards the end of last year, as the Omicron variant bit economies hard and forced lockdowns in many member nations.
The surge in inflation is also the result of higher energy costs, not helped by Russia’s threatening moves against Ukraine and cutting off supplies to Europe.
Whether the ECB can do much though remains to be seen.
Inflation is not consistent across the Eurozone either, with price rises in Germany as high as 5.7% for months, whereas in Portugal it’s just 2.8%, and at the other extreme, Estonia has seen inflation hit 12%.
Formulating monetary policy for a disparate region is tricky even in the best of times, but in uncertain times, it can be impossible.
