ECB Hopes To End Negative Interest Rates By The End Of The Third Quarter

By Mish of MishTalk,

Despite inflation at 7.5%, the ECB struggles to get rates above zero percent. A liftoff to zero is my Hoot of the Day.

Politico reports Eurozone Inflation Hits Fresh Record as Growth Slows. 

Eurozone growth slowed in the first quarter while inflation hit a fresh record high in April, data released by the EU statistics agency showed Friday, stoking fears of stagflation.

Economic growth slowed to 0.2 percent on the quarter from 0.3 percent in the final three months of last year. At the country level, GDP grew by 0.3 percent in Spain and 0.2 percent in Germany, while France stagnated and Italy contracted.

Inflation accelerated further to 7.5 percent in April from 7.4 percent in the previous month. High prices continue to be driven primarily by energy costs, which were up 38 percent on the year. Core inflation, which excludes the volatile factors of food and energy, accelerated from 3.2 percent to 3.9 percent — suggesting that high prices are becoming more entrenched.

Looking at member states, the Baltics were hit hardest. In Estonia, prices were up 19.0 percent, in Lithuania 16.6 percent and in Latvia 13.3 percent.

In the largest member states, by contrast, inflation remained comparatively contained. France was among the lowest, with 5.4 percent. In Italy, inflation was 6.6 percent, and in Germany, 7.8 percent.

New Definition of Contained 

France has 5.4% inflation, Italy 6.6%, and Germany 7.8%. Those numbers look good compared to Estonia at 19.%, Lithuania at 16.6% and Latvia at 13.3%.

This highlights two key things: The idiocy of negative rates and the impossible task of coming up with one rate for the Eurozone that makes any sense at all, positive or negative.

No Panic Yet!

This is what i need to wake up in the morning https://t.co/cQBj41wYpC

— 🅰🅻🅴🆂🆂🅸🅾 (@AlessioUrban) May 24, 2022

Normalization ECB Style 

A blog post by Christine Lagarde, President of the ECB, discusses  Monetary Policy Normalization in the Euro Area. 

Households are the ones suffering most from higher import prices, as rising energy and food inflation are eating into real incomes, and nominal wages are not yet catching up. In fact, real wage growth turned negative in the fourth quarter of last year – the last data point we have – and real wages are likely to be contracting even faster now due to rising inflationary pressures.

High energy costs and supply shortages are now also starting to be felt in industrial production, which contracted in nearly all major economies in March.

Against the backdrop of the evidence I presented above, I expect net purchases under the APP to end very early in the third quarter. This would allow us a rate lift-off at our meeting in July, in line with our forward guidance. Based on the current outlook, we are likely to be in a position to exit negative interest rates by the end of the third quarter.

A Liftoff to Zero!

Note that despite 7.5% inflation the ECB is still conducting QE. The QE ends in July. 

Lagarde defended this economic lunacy with a notion of “a genuine risk of too-low inflation becoming entrenched.”

Lagarde says “the ECB’s policy settings were fully focused on dislodging this disinflationary environment.”

Like the Fed, the ECB was hell bent on producing two percent inflation no matter what it took. 

But it will not be until the end of September before Lagarde pencils in a liftoff to zero percent. By then, the entire Eurozone will be in a rip roaring recession. 

For this ridiculous ideology, Christine Lagarde gets my “Hoot of the Day” award.

These central bankers are truly incompetent, almost beyond belief. 

Historical Perspective on CPI Deflations: How Damaging are They?

Please note a BIS study shows routine price deflation is a benefit, not a curse. 

In their attempts to fight routine consumer price deflation, central bankers create very destructive asset bubbles that eventually collapse, setting off what they should fear – asset bubble deflations.

For discussion, please see Historical Perspective on CPI Deflations: How Damaging are They?