Banks: good things are over | Economy


Christine Lagarde in one of her interventions.
Christine Lagarde in one of her interventions.REUTERS

Central banks operate with more or less broad mandates. The most restricted is the control of inflation, such as that of the European Central Bank. The mandate is apparently pure but covered in nuances in its application. Thus, for example, Draghi was not talking about inflation when he said that “I will do everything possible to save the euro”. In 2012 what was in danger was the very foundations of European monetary stability. That exceptionality saved the single currency and prevented other problems. Since then, risk premiums have been numb. The announcement in recent months by the central banks of the end of the exceptionality is already being felt in the markets that are always ahead. These days, the yield on European sovereign debt is rising. For example, the Greek above 2.35% and the Italian near 1.80%. The Spanish around 1.10%, which represents a risk premium of 85 basis points with respect to the German bond, a tolerable level yet, but of growing concern.

In the United States, although the mandate of the Federal Reserve is broader, the end of quantitative easing and interest rate hikes are not rumors or suspicions, they have already been announced. The Fed knows that taking up the lessons of monetary normality is difficult. After a very complicated January for the traders Americans, February is being a month of acceptance. They have already assumed how the Fed is going to act and, little by little, they recover their tone. Uncertainty is gradually moving to the Eurozone, where its central bank has only —with a possible negative impact on its credibility— changed its tone and discourse a few days ago. Inflation has proven to be persistent. It is not only due to supply bottleneck problems, as was initially thought. Also to a strong demand —driven by the recovery and strong public spending—, which forces the central bank to act.

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It does not seem like a mere technical adjustment. Many believe that the major central banks—including the Fed—are still lagging behind the real pressures of inflation. No sudden surprises, but more restrictive messages are expected soon. In the Eurozone, stopping buying sovereign debt has asymmetric effects. It harms the most indebted states after benefiting them for years. It is the harsh reality. The big question is how the new sovereign debt purchase strategy will be managed. On the other hand, there are the European governments, still intoxicated by the relaxation of measures to boost public spending to combat the pandemic. Sooner than later, it will be time to explain, once again, the fiscal adjustment paths.

A final disadvantage of the ECB compared to other central banks is that it has been anchored in zero rates and extensive purchases for a long time. Everyone trusts the economic recovery as a counterweight to the change in strategy. Something that, however, will not slow down too much (or necessarily) inflation. It seems that good things are coming to an end in the Eurozone.

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George Holan

George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.

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