Trichet Trickery: ECB Turns Hawkish Just As It Warns Of Sharply Higher Inflation, Slower Growth

Trichet Trickery: ECB Turns Hawkish Just As It Warns Of Sharply Higher Inflation, Slower Growth

As noted earlier, the ECB this morning came out with a surprisingly hawkish statement according to which it now expects to QE on an accelerated schedule and end the Asset Purchase Program as soon as Q3 while hinting at an earlier lift off to rates, news which sent peripheral, and especially Italian bonds, tumbling.

And in light of Europe’s record CPI, this is perhaps to be expected. The problem is the ECB is now pulling a page right out of the Jean-Claude Trichet playbook…

Hey guys! Long Time no see!
Feels good to be back!#ECB

— Pete Sampras (@KillinGswitCH98) March 10, 2022

.. and is telegraphing tighter financial conditions just as stagflation is rearing its ugly head.

To wit, the ECB slashed its economic growth projections for the euro area to 3.7% in 2022 from 4.2% and 2.8% in 2023 from 2.9%, while still expecting the economy ti grow 1.6% in 2024.

“In the baseline of the new staff projections which incorporate 1st assessment of implications of the war, GDP has been revised downward,” Lagarde says, blaming the slowdown on the Ukraine war.

More ominously, however, the ECB took its inflation forecasts sharply higher, and now expects 2022 inflation to soar 5.1%, up almost 2% from its 3.2% forecast just three months ago. The bank also hiked its 2023 inflation forecast to 2.1% from 1.8%, but in order to avoid having to hike today, kept its 2024 inflation forecast below 2.0% at 1.9%. Anything else and the central bank would have been accused to violating any number of its mandates.

Alas, there is much more inflation to come: as Lagarde admitted, the war in Ukraine is a substantial upside risk, especially to energy prices,” adding that “energy prices continue to be the main reason for this high rate of inflation.”

She noted that gigher energy prices “also pushing up prices across many other sectors” and warned that iIf price pressures feed through into higher than anticipated wage rises, or if there are adverse persistent supply side implications, inflation could also turn out to be higher.”

It will be, and that’s why the ECB is now trapped, and has no choice but to hike, which however will have absolutely zero impact on the supply-shock (over which central banks are powerless) and instead will not only drag Europe into the next recession but will send peripheral yields soaring which, as everyone knows by now, have only been contained thanks to the ECB’s infinite QE. End that, and everyone will get a stark reminder of Europe’s “doom loop” which after all these years, has still not been fixed.

Bottom line: the ECB may be tightening now, but in one year we almost certainly be witness to another European financial crisis, just like back in 2011, when J-C Trichet hiked rates twice in April and July, only to send Europe into its biggest existential crisis of all time.

Tyler Durden
Thu, 03/10/2022 – 09:22

Share DeepPol