Investment Institute
Viewpoint Chief Economist

Hawks Aplenty

  • 07 February 2022 (7 min read)

Key Points

  • Lagarde sent the ECB on a course consistent with a rate lift-off this year. We expect it in December, but it could come as early as September.
  • The memory of the “Greenspan put” probably makes the Fed ready to look through quite a lot of market pain. For the ECB, fragmentation, as always, would be the problem. As the monetary mood changes in Europe, progress on the fiscal framework must accelerate.

Christine Lagarde’s refusal last week to repeat the point she made in December about a rate hike this year being unlikely, while mentioning a “unanimous concern” about inflation in the Governing Council, is a big shift. The ECB is now ready to follow the Fed with a first hike with only a 6 to 9-month lag – we now expect the lift-off in December. Yet, the Fed “bared its teeth” only when wage data made it absolutely clear the US inflation process had turned endogenous. The ECB is changing its stance before wage acceleration appears in the Euro area. Of course, the January print for consumer prices was hard to ignore, but the ECB’s pre-emptive stance suggests a sensitivity to inflation risks at odds with the cultural change imposed by Draghi during his tenure.

Financial markets are currently bombarded by a steady flow of hawkish signals from all major central banks. On top of the Fed’s and now the ECB’s tougher rhetoric, the Bank of England, upon delivering another 25 basis points hike last week, revealed that 4 members of its Monetary Policy Committee voted for 50 basis points. A key issue is whether the market reaction could ultimately “stay the hand” of the central banks. At the Fed, the memory of the “Greenspan put” and its fateful consequences are probably vivid enough to make the FOMC look through quite a lot of pain on the markets. Asset prices developments would have to significantly affect the real economy before the Fed changes course, especially in a situation where there is enough excess demand for the central bank to take risks with the magnitude of its tightening.

The “feedback loop” works differently in the Euro area. the central bank could not completely ignore a widening in sovereign spreads which would bring back existential questions on the functioning of the Euro area. Fortunately, positive political developments in Italy and Portugal provide a buffer against too brutal a market reaction. Still, If the ECB normalizes faster, the evolution of the fiscal institutions of the EU should also go faster, and deeper. The French Presidency of the EU convened a special European Council on 10-11 March to kickstart discussion on a new model for the Stability and Growth Pact.  The proposal by Giavazzi and Weymuller (economic advisors to Draghi and Macron) we discussed here a few weeks ago is becoming an even more appealing option given the new monetary mood. Draghi’s legacy at the ECB may be in question, but his capacity to shape the debate in Europe remains high.

Download the Insight
Download report (423.64 KB)

Related Articles

Viewpoint Chief Economist

It's starting

  • by Gilles Moëc
  • 27 June 2022 (7 min read)
Viewpoint Chief Economist

It’s Getting Tighter

  • by Gilles Moëc
  • 20 June 2022 (7 min read)
Viewpoint Chief Economist

Bad Peripheral Vision

  • by Gilles Moëc
  • 13 June 2022 (7 min read)

    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.

    All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.

    Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.