The European Central Bank (ECB) has aligned itself with the Fed by ending the rate hike. However, inflation is already on the rise again.
End of monetary tightening for the ECB
After a series of 10 consecutive increases, the ECB kept its key rate unchanged at 4.50%.
“The transmission of previous rate increases to financing conditions remains vigorous. This increasingly slows down demand and thus contributes to the slowdown of inflation”has declared Christine Lagarde.
Interest rates for business loans and home loans reach 5% and 4%, respectively. In France, demand for new housing has never been so low, declaresINSEE in its latest quarterly report.
Concerning Quantitative Easing (QE), remember that around 2/3 of the ECB’s bond portfolio is made up of debt repurchased under the aegis of the APP (Asset Purchase Program), introduced in 2015. The remaining third was purchased via the PEPP program, adopted following the Covid psychosis. That’s almost 5,000 billion euros in total.
The European Central Bank is letting a portion of these bonds mature without buying back more. As a result, its balance sheet decreases by approximately 30 billion euros per month.
This is less than its American counterpart which also sells securities. So much so that its balance sheet is falling by $90 billion per month. In other words, the Fed is reducing its balance sheet three times faster than the ECB.
However, the ECB does not rule out further monetary tightening if necessary:
The President of the ECB even warned that inflation will remain too high for some time to come, conceding that the recent decline in inflation to 4.30% is above all linked to “a baseline effect”.
Now all eyes are on the Middle East, where the next inflationary wave will most likely come from.
Geopolitical risks
Christine Lagarde noted that “energy prices have started to rise again” and they became “less predictable due to new geopolitical tensions”.
Indeed, the Israeli-Palestinian conflict threatens to set the Middle East ablaze. The tone is rising, generating concerns about the global supply of oil and gas. The latter appreciated even more than bitcoin this week…
And let’s not forget that fifty years ago, OPEC member countries initiated an embargo against Western countries supporting Israel:
Rebelote in 2023? The Eastern Libyan Parliament has just called for an immediate halt to oil and gas exports to Italy, France, the United States and the United Kingdom…
[Nous avons parlé du scénario catastrophe d’une fermeture du détroit d’Ormuz par où transite 50 % des exportations de pétrole par voie maritime : Israël vs Iran – Le scénario inflationniste]
What will the ECB do in the event of double-digit inflation this winter?… And what about “structural” inflation, that emanating from natural energy scarcity?
Most people don’t realize how dependent the entire financial system is on a growing, inexpensive-to-produce energy supply.
Repaying debt with interest becomes a Ponzi if growth in energy production is insufficient. The closer we get to energy limits, the more the debt will increase. A crazy inflationary headlong rush.
Cornelian choice
The combination of high interest rates and inflation is forcing ordinary people to cut back on spending. The result is that governments see their tax revenues decline precisely when citizens need social assistance the most.
Public finances are also squeezed by the increase in debt service due to higher interest rates.
This is the problem central banks face today. Can we raise rates until inflation falls without bursting debt bubbles (payment defaults) Unlike past inflationary periods, the debt is immense today…
Paul Volcker’s significant interest rate increases in the 1970s were largely possible due to strong growth in global energy production. However, the situation is very different today.
We reached peak oil production in November 2018. Oil production will now decline unless there is a major discovery. What is increasing is debt, particularly public debt. Hence Christine Lagarde’s statement this Thursday:
“Fiscal policies should be designed to make our economy more productive and to gradually reduce public debt.”
The Fed president did not say anything else a few days earlier. Easier said than done that said. We can bet that politicians will sooner or later force central banks to bring out their printing presses.
Add to all this the hints of World War III and the stage seems set for disturbing events. In particular significant payment defaults.
Hence plan B called CBDC? A currency making possible the rationing of imported products and negative rates to keep the ponzi afloat.
Ultimately, we are heading towards stagflation. Low growth and inflation are the new normal. Hence the growing success of Bitcoin, which appears to be THE hedge against energy and geopolitical tensions.
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