Too much optimism in the market?
Lagarde destroys hope of ECB change of course – DAX gives way
01/19/2023, 4:45 p.m
After a recent weakening of the increase in inflation rates, investors began to hope that the ECB would take a less strict course. Its president warned in Davos not to underestimate the central bank. Inflation rates are still far too high. There is therefore no reason to deviate from the previous course.
The European Central Bank will not let up in its fight against high inflation. The inflation rate is still far too high, said ECB President Christine Lagarde at the World Economic Forum in Davos. “We will stay the course until we have stayed in the restrictive zone long enough to bring inflation back to 2 percent in time.” Economists understand a restrictive level as an interest rate level with which an economy is slowed down.
When asked why the course of the central bank might be underestimated on the financial markets and why the ECB could not convince the markets, Lagarde said: “I would suggest that they reconsider their position. I think they would be well advised to do so. ” The stock exchanges reacted promptly to the statements made by the head of the ECB: the leading German index, the DAX, temporarily increased its losses and was down 1.6 percent.
Recently, falling inflation rates had fueled speculation that the major central banks would slow down interest rates on the financial markets. The ECB has raised key interest rates four times since July 2022 – most recently by 0.5 percentage points in December. The deposit rate, which is decisive on the financial markets and which banks receive from the central bank for parking excess funds, is now 2.0 percent.
Meanwhile, the minutes of the ECB meeting in December show that the central bankers struggled hard to find a compromise. “A large number of members initially supported a 75 basis point hike in key ECB interest rates,” the minutes said. Accordingly, some monetary authorities feared that an increase of less than 0.75 points would send the wrong signal. There was a risk that this would be judged inconsistent with the ECB’s inflation target of 2%. According to the minutes, some euro watchdogs stuck to their position in favor of an increase of three-quarters of a percentage point until the end. According to insiders, a compromise was only reached when Lagarde offered to signal further rate hikes of 50 basis points and make strong statements on inflation at the post-meeting press conference.
She “is way too high”
Inflation had recently fallen and was 9.2 percent in December after 10.1 percent in November. But for the ECB, this is not yet a sign of the all-clear. The ECB looks at inflation in all its measures, Lagarde said. “Inflation in all calculations, however you look at it, is way too high,” she said. Core inflation, which excludes the fluctuating prices for energy, food, alcohol and tobacco, last month even rose by 0.2 points to 5.2 percent in December.
On economic activity, Lagarde said the news had become much more positive in the past few weeks. In the meantime, there is only talk of a slight decline in economic output. Weaker economic activity can currently be seen compared to an excellent year 2022. The growth projections for 2023, on the other hand, are only 0.5 percent. “So it’s not a brilliant year, but it’s a lot better than what we feared.”