The press conferences of the top managers of the central banks have substance. It happened this week with the appearances of the presidents of the US Federal Reserve, Jerome Powell, and of the European Central Bank, Christine Lagarde. Their decisions (respective increases of 25 basis points in official interest rates), although in the same direction, point to different paths. It was noted in Lagarde's explicit words. He distanced himself from the Fed. The environment of both blocks is different, especially since March, when a financial storm broke out in regional banks on the other side of the Atlantic.
This certain disparity in the immediate future is influenced by the fact that official rate levels are significantly higher in the United States (5.25%) than in the euro area (3.75%). It has gone further where it started before and went faster initially. The ECB has closed the gap. In both cases, the rate expectations of a year ago have been widely exceeded. The sticky inflation –although it has gone down– does not give up. It has forced more twists on the price of money than expected.
What should already be called a “crisis” (history will probably use that term when referring to this episode) of the US regional banks represents a considerable obstacle for the Fed. of their efforts – but because of the consequences on their monetary strategy against inflation. The number of affected entities increases every week. Raising rates sharply after so many years of QE without proper banking supervision is what you have. the mess Powell was noticed on Wednesday. Price stability is still on his mind, but he has no choice but to point to a pause in the increase in the cost of money, due to the financial fractures that have already occurred.
In the euro zone, despite the Credit Suisse scare and although vigilance has been reinforced by the episodes in the United States, the focus in recent months has been able to continue on inflation. Financial stability has not required the same attention. For this reason, Lagarde pointed to new increases, perhaps a couple more, of 25 basis points each, which would allow a consensus between the hawkish members and the doves of the ECB Council, which would lead us to official rates above 4%. They would fall into an environment where credit conditions are already tightening, but the full impact of the rate hike on the economy has not yet been felt. It usually takes a bit of a delay. As Lagarde recalled, they go "meeting by meeting" to make decisions. The risk of "going too far" is growing with new rate hikes, which fight inflation, but at the same time, in the current situation, could cause a marked weakening of the economy, including a possible recession, and new headaches.
Santiago Carbó Valverde is Professor of Economic Analysis at the University of Valencia and Director of Financial Studies at Funcas
