ECB’s Blunt Press Statement Today Screams One Big Idea, Stagflation Has Arrived

ECB Press Conference 

Today the ECB hiked rates by three-quarters of a point. 

Let’s tune into the the ECB’s Press Conference hosted by Christine Lagarde, President of the ECB and Luis de Guindos, Vice-President of the ECB.

Key Statements, Emphasis Mine

• The Governing Council today decided to raise the three key ECB interest rates by 75 basis points. This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to our two per cent medium-term target. Based on our current assessment, over the next several meetings we expect to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations.
• Inflation remains far too high and is likely to stay above our target for an extended period. According to Eurostat’s flash estimate, inflation reached 9.1 per cent in August. Soaring energy and food prices, demand pressures in some sectors owing to the reopening of the economy, and supply bottlenecks are still driving up inflation. 
• Price pressures have continued to strengthen and broaden across the economy and inflation may rise further in the near term.
• Very high energy prices are reducing the purchasing power of people’s incomes and, although supply bottlenecks are easing, they are still constraining economic activity. In addition, the adverse geopolitical situation, especially Russia’s unjustified aggression towards Ukraine, is weighing on the confidence of businesses and consumers.
• While buoyant tourism has been supporting economic growth during the third quarter, we expect the economy to slow down substantially over the remainder of this year. 
• While supply bottlenecks have been easing, these continue to gradually feed through to consumer prices and are putting upward pressure on inflation, as is recovering demand in the services sector. The depreciation of the euro has also added to the build-up of inflationary pressures.
• In the context of the slowing global economy, risks to growth are primarily on the downside, in particular in the near term. As reflected in the downside scenario in the staff projections, a long-lasting war in Ukraine remains a significant risk to growth, especially if firms and households faced rationing of energy supplies.
• Summing up, we raised the three key ECB interest rates by 75 basis points today, and expect to raise interest rates further, because inflation remains far too high and is likely to stay above our target for an extended period. 

Short Synopsis 

• Inflation remains far too high and is likely to stay above our target for an extended period. 
• There is risk of a persistent upward shift in inflation expectations.
• Price pressures have continued to strengthen and broaden across the economy.
• While buoyant tourism has been supporting economic growth during the third quarter, we expect the economy to slow down substantially over the remainder of this year.
• The depreciation of the euro has also added to the build-up of inflationary pressures.
• Risks to growth are primarily on the downside
• The ECB expects to raise interest rates further, because inflation remains far too high and is likely to stay above target for an extended period.

Nonsensical Growth Projections

Buried in the middle of the above blunt assessment was this bit of economic cheerleading nonsense.

“Staff now expect the economy to grow by 3.1 per cent in 2022, 0.9 per cent in 2023 and 1.9 per cent in 2024.”

Say what? No Recession?!

Nearly every statement in the press conference excluding those ridiculous projections screams one big idea “stagflation”. 

High persistent inflation, risks to the downside, a slowdown in tourism, and Germany literally falling off a manufacturing cliff coupled with promises of more rate hikes does not add up to economic growth. 

Economists and bureaucrats never predict or even admit recession even when it’s damn obvious.

Those “downside risks” are guaranteed to happen. 

What About the Dollar?

Good question. 

If the Fed fails to deliver on more rate hikes after September while the ECB tightens in the midst of recession, that would tend to put negative pressure on the US dollar, in isolation.

Fed hikes relative to the ECB certainly helped the #dollar

But so have sanctions. Sanctions backfired everywhere, but crippled the EU.

On this line of thinking, the Euro (and especially German industry) has more to gain from a settlement with Russia than the Dollar.

— Mike “Mish” Shedlock (@MishGEA) September 8, 2022

Dollar bulls note, we can easily be at or approaching the peak in the US dollar depending on actions taken by the Fed and ECB.

The EU’s Robin Hood Energy Proposal Caps Profit and Prices, Seeks Solidarity

In case you missed it, EU what remains of EU solidarity is fading fast.

Countries cannot agree with what to do about energy prices or Ukraine. France and Germany and Italy want talks with Russia. 

Eastern Europe, especially Poland does not. Nor does Poland agree with the EU’s Robin Hood approach to redistributing the pains and gains of clean vs non-clean energy. 

For discussion, please see The EU’s Robin Hood Energy Proposal Caps Profit and Prices, Seeks Solidarity

If one ever needed more evidence that sanctions tend to backfire, sometimes spectacularly, please look at what’s happening in Europe right now.  

The current state of affair cannot last forever. However, there is no political impetus for change at a high enough level that matters.

For discussion on what needs to happen please see Q&A on Putin and Energy Price Caps, Does Anyone Have a Better Idea?

This post originated at MishTalk.Com.

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