Author丨Wu Bin
Edit丨Li Yingliang
Picture Source丨 Visual China
Seeing that inflation is almost out of control, dovish European Central Bank finally ushered in a "mileage-mark rate hike ". The last rate hike dates back to 2011, when the two rate hikes were on the eve of the eurozone debt crisis.
On July 21 local time, the European Central Bank announced its interest rate resolution, unexpectedly hikes by 50 basis points, directly bidding farewell to the "negative interest rate era". After the
interest rate resolution was announced, euro soared against the US dollar in the short term, breaking through the 1.02 mark, European stocks fell, and the yield on treasury bonds in many European countries rose sharply.
This sharp interest rate hike also means that forward guidance has completely failed to keep up with the inflation trend, and the European Central Bank has entered a "data dependence model."
According to the forward guidance of the June meeting, ECB will only gradually raise interest rates, raising interest rates by 25 basis points in July, postponing a larger rate hike until September.
Overall, the sharp 50 basis points hike this time is "unexpected and reasonable". European Central Bank President Lagarde on June 28 left room for a rate hike of more than 25 basis points. "In some cases, gradualism is obviously inappropriate. For example, if we see higher inflation and threaten the anchorage of for inflation expectations, or there are signs that inflation makes economic potential more permanent and limits the availability of resources, we will need to withdraw easing more quickly."
Then the euro zone inflation did explode again, with the euro zone's June inflation data released in July exceeding expectations, setting a record high of 8.6%, more than four times the 2% inflation target.
After this vigorous rate hike, the market expects that the European Central Bank will raise at least 50 basis points at its next meeting, completely bidding farewell to the "negative interest rate era".
"late" rate hike
The ECB's rate hike can be said to be "later".
April CPI released on May 18 soared to a record high of 7.4%. At that time, there were already voices calling on the ECB to raise interest rates at its June meeting, but in the end, the ECB chose to remain silent.
Debang Securities Chief economist Luzhe Analyst of 21st Century Business Herald reporters said that the European Central Bank's interest rate hikes were too late and had missed the best time to control inflation, which may lead to more stubborn inflation problems. At the same time, interest rate hikes mean that the financing costs in the euro zone will begin to rise, which is even more unfavorable to economic growth.
From another perspective, the European Central Bank is not unaware of the high inflation problem, but is afraid that too hasty interest rate hikes will kill the economy.
On June 29, European Central Bank President Lagarde said bluntly at the ECB Forum that she does not think that "you can still go back to a low-inflation environment." "Due to the epidemic and the huge impact of geopolitical we are facing now, some things have been released and they will change the general environment we are in."
Senior analyst Fawad Razaqzada of Jiasheng Group told the 21st Century Business Herald reporter that the ECB launched a slow and cautious normalization process from the end of 2021, which is a wrong decision, and the ECB needs to make corrections with more active interest rate hikes.
Regarding the "unexpected" raising interest rates by 50 basis points, Razaqzada analyzed that the ECB made it very clear at its June meeting that it would raise interest rates by 25 basis points in July. But since then, the situation has changed a lot: the euro/dollar fell below parity for a time, exacerbating the pressure of imported inflation; the euro zone CPI hit a record high of 8.6% in June, far higher than 8.1% in May; European data continued to deteriorate, and data such as PMI were worse than expected, further raising concerns about stagflation. What does
say goodbye to the " negative interest rate era" mean?
As the European Central Bank vigorously raises interest rates by 50 basis points in one go, the "negative interest rate era" has ended, and the euro zone is turning a new page. In terms of positive aspects, Lu Haomin, a researcher at the China Banking Institute, analyzed to a reporter from 21st Century Business Herald that bid farewell to the era of negative interest rates to help support the strengthening of the euro and activate the price signal effect of interest rates, which can promote economic growth to a certain extent.As the European Central Bank tightens market liquidity, the scale of negative interest rate bonds will continue to decline, thereby preventing the continued outflow of fixed-income bond funds and attracting portfolios to flow into the euro zone. At the same time, as the negative interest rate policy is withdrawn, the ECB's regular monetary policy transmission channels will gradually be smooth, which will help strengthen the counter-cyclical regulating capabilities and promote economic growth in the euro zone.
On the other hand, it is an indisputable fact that the euro zone's financing costs are rising. The risk of "fragmentation" in the euro zone has intensified, and the interest rate spread between the national bonds of the national bonds of southern European member countries and German national bonds has widened, which has led to financing difficulties and rising costs in southern European countries, which may trigger the sovereign debt crisis again. Just as the rate hike was announced, the ECB also approved a new interest rate spread control tool, the so-called anti-fragmentation tool - the Conduction Protection Tool (TPI). The ECB believes that TPI is an important tool to ensure the smooth transmission of monetary policy among member states and ensure policy unity.
In Lu Haomin's view, with the European Central Bank's transformation to a hawkish, borrowing costs in European high-debt countries represented by Greece and Italy have soared, resulting in an intensified government sovereign debt risks. Under the impact of the new crown epidemic, Italy has implemented a large-scale fiscal stimulus plan and a series of government relief plans, causing its government debt to increase from 134.8% of GDP in 2019 to 153.5% of 2021. When the era of negative interest rates is over, the debt repayment pressure in European countries with high debt will increase. What's worse is that the political turmoil in Italy has exacerbated the risks. Recently, the interest rate gap between Italian bonds and German bonds has been widening.
Italian Prime Minister Draghi th 20th, although he won the vote of trust in Senate with 95 votes/38 votes on the 7th 20th, the right-wing parties Italian Power Party , Italian Alliance Party and populist party Five-star movement did not participate in the vote. The large number of abstentions from the three major parties indicated that Draghi no longer received the majority support of the parliament.
On the 21st local time, Italian Prime Minister Draghi went to the Presidential Palace again to submit his resignation. This time, Italian President Mattarella accepted Draghi's resignation at the Presidential Palace. The Italian presidential palace said that Mattarella asked Draghi to continue serving as a guardian prime minister to handle current affairs. Italy may hold a general election in September.
In the bond market, Italian government bonds were sold off on the 20th. The yield on Italian 10-year government bonds rose 6.1 basis points on the same day to 3.374%, while the yield on German 10-year government bonds fell 1.9 basis points to 1.250%. The interest rate spread of Italian and German 10-year government bonds further widened to 216 basis points. After Mattarella accepted Draghi's resignation on the 21st, Italy once again ushered in a double-debt victory in stocks and bonds, and the interest rate spread of the 10-year treasury bond yield expanded to nearly 240 basis points.
"road to differentiation" must continue to follow
Although there is already "learning from the previous car" of the Federal Reserve , the European Central Bank still misjudged the inflation situation again, turning inflation from a small problem to a big problem. To a certain extent, the inflation problem is almost "terminal".
The euro zone inflation rate continued to rise in June due to soaring food and energy prices. Data released by the European Statistics Office on the 19th showed that after the eurozone reconciled CPI rose by 8.1% year-on-year in May, it continued to soar to 8.6% in June, continuing to hit a historical high.
Therefore, some people criticized the ECB's interest rates as far behind the inflation curve, especially compared with hawkish central bank such as the Federal Reserve. But others pointed out that the ECB's sharp rate hikes could exacerbate the recession.
It should be noted that in the case of a political crisis in Italy and a shortage of natural gas in may lead to a recession in Europe, the ECB's interest rate hike will inevitably further suppress the already slowing economy. If Russia stops winter energy supply, the risk of recession will intensify.
EU latest economic forecast shows that the euro zone's economic growth rate in 2022 is expected to drop from 2.7% in the spring to 2.6%, and the growth expectation for next year will drop sharply from 2.3% to 1.4%. At the same time, the EU Executive Committee said on the 20th that the euro zone consumer confidence index fell to -27 in July, down 3.2 from June, setting a record low, far lower than the market forecast -24.9.
This also means that the European Central Bank's chances of hikes are "passionate". HSBC Forex strategist Dominic Bunning believes that the ECB may struggle to conduct a larger policy tightening in the coming months: the window for interest rate hikes is closing rapidly, and the euro zone economy is slowing regardless of what the ECB does. Compared with
, although European and American countries generally face inflation problems, the euro zone is even worse. Against the backdrop of the Russian-Ukrainian conflict, the risk of stagflation in Europe is much more serious than that in the United States, which also means that the monetary policies of the European Central Bank and the Federal Reserve will continue to diverge in the future.
The European Central Bank is still lagging behind the pace of many central banks such as the Federal Reserve. The Fed has been raising interest rates since March, and the latest choice was 75 basis points. It is expected that the Fed will choose to raise interest rates by 75 basis points again at its meeting next week.
Lu Zhe analyzed to reporters that the direction of monetary policy in Europe and the United States will continue to be the same direction, but the differentiation of the degree of tightening still exists. A relatively good economy and demand are the confidence of the Federal Reserve to accelerate tightening, which is an objective condition that the European Central Bank does not have.
The ECB's interest rate hike also reminds the market of European debt crisis more than ten years ago. The transmission of interest rate hikes within Europe is very uneven. The eurozone treasury bond market includes 19 countries, and the credit levels of government bonds vary greatly between countries. Among the large-scale treasury bond selloffs caused by the ECB interest rate hike, the first to be the debtor countries represented by Italy and Greece. The last ECB rate hike triggered a sovereign debt crisis in the euro zone, causing it to cut interest rates three months later.
For Europe, the bigger challenge is obviously still to come. If natural gas supply changes in winter, the risk of economic recession will be further intensified, and the European economy may fall into recession in the upcoming cold winter.
E N D
Editor of this issue Liu Xiang Intern Lin Xiying
