Analysis: the “agile” Fed reduces the normalization window for the timid ECB

FRANKFURT, Jan 27 (Reuters) – A flurry of rate hikes by the U.S. Federal Reserve will make life more difficult for the European Central Bank in the year ahead, even as their policymakers so far seem unconcerned. separate.

The Fed signaled a rapid streak of rate hikes to bring inflation down on Wednesday, accelerating its divergence with an ECB that continues to promise hearty stimulus this year and essentially rules out any hikes until 2023.

The fundamentals support the position of the ECB. European inflation is lower, wage pressures are still subdued and employment has yet to recover to pre-pandemic levels, all suggesting that high inflation, a function of soaring oil prices energy, will indeed pass, as now expected.

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The problem lies in the increased aggressiveness of the Fed’s stance, as “agile” action, as Chairman Jerome Powell has pointed out, suggests that the US central bank will also complete its tightening cycle faster than through the passed, giving the ECB a shorter time to act.

“If the Fed completes its hike in 2023, history suggests it will consider spending cuts by 2024,” said Danske Bank chief strategist Piet Haines Christiansen.

“That leaves the ECB with a very narrow window to act because I just don’t see the ECB tightening while the Fed is on hold or preparing for an easing cycle.”

Although independent, the ECB has tended to follow the Fed with a slight lag and the few rate hikes it has made out of step with its US counterpart, including moves in 2008 and 2011, are now widely seen as political mistakes.

Even in a hawkish scenario, the ECB’s first hike wouldn’t come until the spring of 2023, giving it time for about two hikes before the Fed ends, analysts say.


The ECB could act faster but, having missed its inflation target for a decade and carrying a legacy of misguided rate hikes, the ECB seems almost certain to err on the side of caution, especially with a dovish majority in its Board of Governors responsible for setting rates.

Indeed, analysts see only tentative moves with pauses and escape clauses, suggesting that the ECB will not only act with a big lag, its moves will also be more modest.

This represents such a disconnect with the Fed that markets seem reluctant to place much faith in the ECB’s rate outlook.

Despite an explicit statement by ECB chief executive Christine Lagarde that any move this year is “very unlikely”, investors have forecast 20 basis points of hikes ahead of 2023.

That leaves the bank with a tricky communications challenge for its Feb. 3 policy meeting.

To protect her credibility, Lagarde can’t even consider a hike this year, but pushing back too hard would force her to tie her hands even more, a risky exercise given a stubbornly volatile and uncertain inflation environment.

“Until 2022, despite all the pressure they will be under from high inflation to politics, they will continue to insist on sequencing their moves and, by extension, push the hike back into next year,” he said. said Frederik Ducrozet, strategist at Pictet Wealth Management.

The ECB’s guidance now stipulates that rates will only rise “soon after” the end of the bond purchases which are currently planned at least until the fourth quarter and in any case for as long as necessary.

“The problem is 2023, because markets will price in an end to bond buying by then, even if a big supply will come from Italy,” Ducrozet said. “It’s just hard to see ECB normalization without bond market volatility.”

That in turn could make the ECB hesitant, fearing soaring debt costs could derail growth.

If the ECB fails to seize the opportunity to normalize policy, rates will remain deep in negative territory, leaving it little room for easing in the next downturn and adding weight to the criticism that ultra -easy has become the norm, not the exception.

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Editing by John Stonestreet

Our standards: The Thomson Reuters Trust Principles.

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