At its last summit meeting in Frankfurt, the European Central Bank left its interest rates unchanged. Continuing the fight against inflation, reacting or not in the face of a complicated international and geopolitical situation, internal criticism… For Jean-Paul Betbeze, the credibility of a central bank is built and judged over time
That’s THE question. The European Central Bank, as expected, did not cut rates on Thursday, January 25. It left its interest rate on main refinancing operations at 4.50%. It faces inflation at 2.9%, to meet its constantly repeated mandate of “2% in the medium term”. Nothing has changed, either, on the other aspects of its policy concerning the slow amortisation of its securities portfolios (APP and PEEP). It is therefore continuing, waiting for its restrictive policy to reveal the positive effects it foresees. According to her, wage growth would moderate, by cutting into margins more than by raising selling prices. Is it therefore credible in its strategy to fight inflation, especially since it has announced that it is also avoiding a recession?
“The criticism of the ECB’s conservatism is not over”
Because, as always before the decision, the markets’ nervousness was mounting over this rate maintenance, at a time when signs of weakening were worrying, with -0.1% growth in the third quarter. The question was increasingly about the ECB’s “prudence” in the face of this risk of recession, if not its obstinacy. Asked about this risk in her press conference presenting the decisions of the Monetary Policy Council, Christine Lagarde quoted Janet Yellen: “Two consecutive quarters to declare a recession means forgetting other statistics, notably employment”. And, in fact, in the euro zone, the unemployment rate rose from 6.5% in July to 6.4% in November. Will the argument suffice? Because we can’t forget that, during this time, the US economy was growing by +0.8%. The criticism of the ECB’s conservatism is therefore not over and will depend on the next surveys, in a few weeks’ time.
Because, as always before the decision, the markets’ nervousness was mounting over this rate maintenance, at a time when signs of weakening were worrying, with -0.1% growth in the third quarter. The question was increasingly about the ECB’s “prudence” in the face of this risk of recession, if not its obstinacy. Asked about this risk in her press conference presenting the decisions of the Monetary Policy Council, Christine Lagarde quoted Janet Yellen: “Two consecutive quarters to declare a recession means forgetting other statistics, notably employment”. And, in fact, in the euro zone, the unemployment rate rose from 6.5% in July to 6.4% in November. Will the argument suffice? Because we can’t forget that, during this time, the US economy was growing by +0.8%. The criticism of the ECB’s conservatism is therefore not over and will depend on the next surveys, in a few weeks’ time.
But President Lagarde was also expected elsewhere, on her responses to the results of a “survey”: that of the internal union Ipso, very negative results. The third exercise of its kind, after those on Jean-Claude Trichet in 2011 and Mario Draghi in 2019, it gives him 53% of negative opinions (against 23% positive) for 1,100 respondents. We are far from the 64% of positive judgments for Jean-Claude Trichet and the 76% for Mario Draghi at the end of their mandate, Christine Lagarde being in the middle of hers!
A lack of internal enthusiasm?
With aplomb, she replies that in the ECB’s internal surveys, at least 80% of employees say they are not only satisfied, but even more proud, to work for, and for, the ECB. And that it’s not about the person.
Perhaps indeed the ECB’s credibility goes beyond inflation figures, in its ability to navigate the troubled waters of this time? Jean-Claude Trichet continued on the path traced by the BUBA, in a more homogeneous eurozone. Mario Draghi avoided the worst of an internal crisis, at the cost of… with BUBA! Christine Lagarde is steering a more complex and slower package, in the midst of an ecological crisis, a global technological revolution, rising tensions with China, plus a war in Ukraine, plus the one between Israel and Gaza, all after a pandemic. Is it that easy?
Maintaining the credibility of the ECB
The credibility of a central bank is built over time, with the quality of its economy, its political support to ensure its independence and the degrees of freedom given to it by its objectives and tools. The ECB is new, its economy slow and policies silent, for the time being. But its German legacy: a single price target, versus price and employment for its competitor the U.S. central bank, has become more burdensome. At each meeting, Mrs Lagarde, like her predecessor, calls for an acceleration towards a banking union and a capital markets union, in other words towards more federalism. This is THE problem of the ECB: an intermediate position for reasons linked to the political compromise of its birth, which finds its limits when, as if by chance, nationalism rises.
The credibility of the ECB? More than ever, everyone’s business.
