ECB has a credibility issue as it was clearly caught out by the initial price surge, downplaying it as short-term fallout from Covid
Maybe the ECB has an inside track sometimes but most of the time it is just waiting for signals from the real economy. ECB chief Christine Lagarde and the bank’s chief economist Philip Lane are blue in the face telling reporters that rate decisions are “data-dependent” and that they themselves don’t know what the terminal point for interest rates will be in the current cycle.
A big problem for the ECB – in the current inflation-driven cycle – is credibility. It was clearly caught out by the initial price surge, downplaying it as a short-term manifestation of the Covid lockdowns and the disruption to international supply chains. Lagarde was using the word “transitory”, predicting the whole thing would blow over in the second half of 2022, right up until Russia’s invasion of Ukraine effectively ended the argument.
Either way, since July, Frankfurt has been playing catch-up. For idiosyncratic scheduling reasons, the ECB got to go in advance of the Federal Reserve this month just as banking sector jitters reached fever pitch with talk of contagion and bailouts eerily reminiscent of 2008. “There is no trade-off between price stability and financial stability. And I think that if anything, with this decision, we are demonstrating this,” she said.
That said, the financial system seems to have sinkholes that only become visible when something goes wrong. The Bank of England’s recent bond market intervention is a case in point. In September, it was forced to step in after a massive sell-off of UK government bonds – known as gilts – brought pension funds to within hours of collapse. Nobody had seemed to highlight this as a potential risk until it happened.
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