Inflation forces the ECB and the Fed to tighten monetary policy faster to curb its escalation

The data released on Friday in the US was confirmation that inflation has not even stabilized. To stop their escalation, both the Federal Reserve (Fed)As the European Central Bank (ECB) they will be forced to tighten their monetary policy even faster.

Contrary to expectations, the US consumer price index (CPI) reached 8.6% in the interannual rate in the month of May, figures that had not been known since December 1981.

The underlying rate – the one that rules out energy and food because they are the most volatile components – also stood at 6% compared to the same month of the previous year.


US inflation fell like a bucket of cold water on financial markets, which fear that it will serve as argument to the Fed to accelerate the pace of rate hikes.

It does not seem unreasonable if one takes into account that the US central bank has already increased the price of money on two occasions without having managed, at least for now, to stop the rise in prices.

In March, the increase was 25 basis points. The institution chaired by Jerome Powell accelerated in May and carried out the largest increase in money prices in the last 22 years. He hiked rates by 50 basis points in one fell swoop to put them in a target range of 0.75% to 1%.

50 points

In that appointment, the monetary authority announced the beginning of the reduction of its balance and left the door open to a rate hike of another 50 basis points both at the June meeting, which takes place next week, and at the September meeting.

Investment banks, analysts and experts expected that, from then on, the central bank would put on the brakes to recalibrate its policy and analyze its effects on the economy.

Aa what until then the CPI for June, July and August will be known, the figures for May are very far from having given a “clear and convincing” signal, as Powell called for, to reduce the pace of rate hikes.

Lyou futures now anticipate that the Fed will increase the price of money throughout the exercise until reaching the target range of between 3% and 3.25%. That is, 225 points above current levels.

Energy

The price situation in the eurozone is not very different. In the euro bloc, inflation marked historical highs in May, reaching 8.1% compared to the same month in 2021. This figure multiplies by four the objective of 2% set by the ECB.

If the data is broken down by country, they offer similar results. In Germany, inflation rose to 7.9% in the fifth month of the year, a historic figure for the German economy. In France it increased to 5.8%; in Italy, 6.9% and in Spain, 8.7%.

The rising energy and food prices are at the origin of these percentages. A circumstance that has no sign of reversing while the conflict in Ukraine continues and after the European Union (EU) has vetoed most of the purchases of Russian crude oil and gas.


Made with Flourish

just a few days ago, the International Energy Agency (IEA) warned that Europe is facing a summer season in which there are likely to be supply problems for all types of fuels, due to the current environment of supply problems and high prices.

projections

The ECB’s own projections are not very encouraging. The monetary authority expects average inflation in the eurozone is 6.8% in 2022. But that’s just your base scenario.

If the most adverse circumstances occur, the rise in prices could be, on average, 7.1% this year; while in the best of cases the institution expects the average CPI to be 5.9%.

With these perspectives, last Thursday, the institution already announced that will raise interest rates by 25 basis points in July and advanced another increase in September.

“The calibration of this rate hike will depend on the medium-term inflation outlook,” so if these forecasts “persist or deteriorate, a greater increase will be appropriate,” the institution said in the statement issued after the meeting of the Thursday. Namely, left the door open for 50-point raises.

falcons

In her subsequent appearance, Lagarde was tougher than in previous statements and pointed out that these are the first steps on the road to normalizing monetary policy.

In this way, the members of the institution known as hawksthose who consider interest rate hikes of 50 points necessary to fight inflation.

The institution’s toughest wing is also gaining support among analysts. Experts at Deutsche Bank now expect the ECB to make two 50 basis point hikes after the planned 25 in July. At Morgan Stanley they expect a rise of 50 points in September, an opinion they share with the managers of Axa IM.

The fear that central banks will have to speed up their monetary policies to curb inflation and that end up causing a recession they weigh about the bags Westerners. On Friday, the stock markets on both sides of the Atlantic closed the session with falls of between 3% and 4%.

On the contrary, the interests of the European and American debt in the long term they have increased strongly.

While the required return on the US bond is once again above 3%, the interest on the European ‘paper’ with the same maturity is at 2014 highs. The increase has been greater in the case of peripheral debt, which has caused a sharp rise in risk premiums.

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