Den økonomiske rådgiver i den italienske bank UniCredit, Erik F. Nielsen, langer ud efter den nye, høgeagtige kurs hos ECB. Det skader de gældsramte, sydeuropæiske lande, der kan få en renteforskel over for Nordeuropa på 1,5 procent. Han taler om fejltagelser hos ECB. En kursændring er en fejltagelse, da væksten i eurozonen ikke kommer op på før-pandemi-niveauet før tidligst om to år. Der er så megen usikkerhed nu, så det i sig selv maner til forsigtighed. Det er en fejltagelse af mene, at den hidtidige lempelige politik fører til uansvarlige finanspolitiske beslutninger i eurozonen. Kursændringen i ECB vil føre til langt højere renter end forventet og nødvendig, mener han.
A policy mistake at ECB
Forecasting is difficult at the best of times, and extremely uncertain in times like these, but I’ll make three observations to suggest that the virtually pre-announced policy tightening (of an end to net purchases in maybe Q3, and rate increases to at least zero within a year or so) are very likely to be a policy mistake.
First, I am not aware of a single economics-based forecast that has eurozone GDP reaching the extension of the pre-pandemic trend line until 2024, at the earliest. Part of the reason is the inevitable headwinds from fiscal consolidation baked into the outlook, the continuing supply constraints as well as the prospect of a further de-globalization. This implies both a slowing path of GDP growth over the medium term, as well as a possible hit to potential output. How this impacts the output gap and the changes in it, and hence core inflation during the next 2-5 years, remains uncertain, of course. But again, I haven’t seen a single comprehensive forecast which has inflation above 2% over the medium term. Those arguing for monetary policy tightening owe the public their forecasts for why it’s called for, given the ECB’s mandate.
Second and related, uncertainty is indeed the dominant feature now, and it is only appropriate for a central bank to keep all its options open. You may recall my long-held skepticism towards forward guidance if it goes beyond providing us with: (i) the central forecast, (ii) the risk assessment, and (iii) the reaction function. The ECB is scrambling a bit here, partly because the forecast is no longer clear.
Not only are the ECB staff forecasts subject to revisions, Lagarde emphasized on Thursday that while the staff forecast includes a set of assumptions, the GC members may have different assumptions. So what forecast exactly is it that informs the decisions on policies?
In times of elevated uncertainty, policymakers should step extra carefully, as noted by former ECB Vice President Constancio in an impressively succinct thread of tweets on Friday: When “facing uncertainty in the models and projections, policy should do less”, he wrote, concluding (in apparent reference to the panic at the ECB over the present inflation numbers) with this important quote from the great Alan Blinder: “Looking out the window, seeing the temperature, and deciding, is a very bad strategy for monetary policy”.
Third, combining the missing clear forecasts and struggling with the reaction function, I can’t help but conclude that a measurable part of the rationale for ending QE during the summer is an unquantifiable discomfort with a large central bank balance sheet, a belief that QE encourages policymakers in some countries to conduct irresponsible fiscal policies, fear of socalled fiscal dominance and (possibly) other shadows on the wall.
Either way, valid concerns or not, any such concerns should be spelled out and explained before they enter the reaction function.
I very much doubt that markets are right in pricing in a terminal rate of only about 0.5% already in some 18 months’ time. Overheating and demand-pull inflation will not be tamed by a policy rate of 0.5%. Then, as a rough indication, I think we are talking about a policy rate during 2023-24 of 2%-3% minimum, before underlying inflation settles at 2%.
More importantly, however, in this (for me much more likely) scenario, we’ll pay the price for the premature tightening as we move through 2023-24 in the form of lower growth, higher unemployment and inflation well below 2%. Bad as that will be, there is a much the bigger problem: The likely return to the bad old days of fragmentation. Even with Italy’s presently outstanding policies and reasonable clarity on politics for the next year, BTP spreads over Bunds widened massively.
If this is “the new normal”, then Italy – and the rest of the south – will be looking forward to a monetary policy stance that’s considerably tighter than in Northern Europe. This will not cause major problems for fiscal policy because the roughly seven years average maturity of the debt (and, as a share of revenue, they’ll remain well below their historical average for years to come), but it’ll weigh on private investment, growth and employment – and, in turn, maybe then on politics too.
Lots have been said, written – and hoped – about the effects on spreads of this past year’s markedly better policies in Italy and other southern European countries, as well as of the NGEU, but judged by the market reaction to the (admittedly clumsy) ECB press conference, we are far from being out of the woods when it comes to the even transmission of monetary policy in the eurozone, and hence to the danger of fragmentation.
When Lagarde overlooked the importance of a broadly equal transmission of monetary policy during her press conference in late 2019, she was quickly reminded, and she tried to put things right. But the issue was only truly addressed with the PEPP and the explicit statement that ECB policies apply equally to all constituencies of the eurozone.
As the ECB now indicates an end not only to PEPP, but to all net purchases, they’ll need to clarify whether they still care about a broadly similar monetary policy stance across the eurozone, and how they’ll achieve it – or whether the private sector in the south should now expect interest rates of some 150bp higher than what their competitors in the north benefit from.
Over to you, ECB.
