Lagarde Prepares for ECB Liftoff With Yet More
Record Inflation
Only two more consumer-price reports due before July
hike
Strong readings might push central bank to boost rates
faster
By Alessandra
Migliaccio
29 May
2022, 08:00 CEST
The
European Central Bank’s debate over how aggressively to tighten monetary policy
is likely to intensify this week in the prelude to a pre-decision blackout period
as data probably show a new record for inflation.
All but one
economist surveyed by Bloomberg foresee an acceleration in annual price
increases, with the median estimate at 7.8%. Out of the four biggest economies
in the euro region, only Spain won’t show a quickening in inflation.
Those data
will emerge against the backdrop of a vigorous public discussion on interest
rates by ECB officials whose window to speak out before the June 9 decision
will close on Thursday.
Euro-area
inflation probably accelerated to 7.8% in May
Behind the
scenes meanwhile, exchanges between staff in Frankfurt and at central banks
around the euro zone will also pick up pace as they finalize crucial forecasts
for President Christine Lagarde to unveil the following week alongside a
choreography of planned tightening through September.
All of that
will be pivotal for officials arguing over how fast and how far rates will
rise. Dutch central bank Governor Klaas Knot, who won’t rule out an aggressive
half-point increase as the US Federal Reserve delivered this month, points to
inflation and associated underlying indicators as key data to watch.
“These new
numbers are extremely important to determine the speed at which rate hikes will
need to happen,” Giorgio di Giorgio, a professor at Luiss University in Rome,
said in an interview. “There’s a real tangle of factors that have come together
to complicate the picture, from the pandemic to supply bottle necks, then the
war in Ukraine, now China’s zero Covid policy and its fallout.”
What
Bloomberg Economics Says...
“Together
with weak sentiment, high energy costs are holding back the eurozone’s economic
recovery. Even so, mounting underlying inflationary pressure is also
strengthening the ECB’s resolve to lift rates. We see 25-basis-point hikes in
July, September and December.”
The
inflation statistics will begin trickling out on Monday, with Spain forecast by
economists at 8.3% and then Germany at 8.1%. Belgium will also publish price
data that day. Then on Tuesday, reports will be released for France and Italy
as well as Austria, Portugal, Slovenia and the euro zone as a whole.
The
region’s so-called measure of core inflation, stripping out volatile elements
such as food and energy, is also likely to reach a new record, at 3.6%.
Meanwhile the 0.6% monthly consumer-price increase predicted by economists
would match that of April.
“Even when
supply shocks fade, the disinflationary dynamics of the past decade are unlikely
to return,” Lagarde said last week in a blog post laying out what ECB officials
describe as a roadmap for monetary policy. “As a result, it is appropriate for
policy to return to more normal settings.”
The
president signaled the probable outcomes of the ECB’s three next decisions,
with June’s likely to confirm an end to bond purchases, followed by
quarter-point rate increases in July and September to exit subzero monetary
policy.
How that
path materializes is the focus of robust debate, with some officials pushing
for bigger hikes to be at least an option. They include Knot, his Austrian
colleague Robert Holzmann, and Latvia’s Martins Kazaks.
Bundesbank
President Joachim Nagel may concur. He also expressed ambitions for at least
three moves to get ECB rates above zero before the end of the year, in an
interview with Spiegel released on Friday.
By contrast,
his French colleague Francois Villeroy de Galhau insisted to Bloomberg
Television last week that a half-point increase “is not part of the consensus
at this point, I am clear.” He still reckoned on the rate rising next year to a
level deemed as neutral that neither stimulates nor constricts the economy, and
held out the possibility it may need to go higher.
He is among
several policy makers still due to speak before the pre-decision blackout
period begins. More of those appearances will be by officials usually
considered more dovish, including Bank of Italy Governor Ignazio Visco and Bank
of Spain chief Pablo Hernandez de Cos.
Higher Inflation, Weaker Growth
The ECB is set to revise its economic predictions in
June
ECB Chief
Economist Philip Lane, who is seen in the same camp, is also due to speak. All
the while he will be managing the process of compiling quarterly forecasts.
Unlike the last outlook in March, this projection exercise is a more
comprehensive biannual effort involving national central bank staff.
The numbers
will be all the more important for the role they will play in the decision on
June 9. ECB Vice President Luis de Guindos told Bloomberg Television last week
that the outlook won’t be “very different” from that of the European
Commission. Its officials predicted on May 16 that inflation will average 6.1%
this year and will be 2.7% next year, still above the ECB’s 2% goal.
For veteran
UK economist Charles Goodhart, a former Bank of England policy maker who
anticipated the inflation shock early on in the pandemic, the supply-focused
nature of the price surge afflicting the euro zone makes the job of Lagarde and
her colleagues all the more challenging.
“It’s a
very, very difficult situation for the ECB -- it’s harder in many ways for the
ECB than it is for the Fed,” he told a conference in Madrid last week. “Dealing
with a supply shock is a great deal more difficult than dealing with a demand
shock.”
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