The ECB again raised its key rate by 0.75%, but the tide seems to be turning. Will Christine Lagarde soon bring out her money printing press?
The ECB rises, its key rate drops to 2%
The ECB raised its key interest rates by 0.75%. The borrowing rate for private banks goes to 2%, the highest since 2009. The interest rate on private bank deposits with the ECB goes to 1.50%.
Faced with inflation reaching 10% in the euro zone, ie five times her target of 2%, the President of the ECB wanted to be resolute. “We have to do the right thing” to bring down inflation, she said.
It was a thinly veiled response to the Italian Prime Minister for whom the tightening of monetary policy is “a rash choice”. As well as to Emmanuel Macron, who was worried about seeing central banks “break demand” to fight inflation.
ECB and Quantitative Easing
With regard to “QE” (money printing), the Board of Governors intends to continue the “reinvestment”. Enough to ?
As a reminder, the ECB holds for about 5 trillion euros in government debt, or more than 40% of all public debt in the euro zone…
Of course, these debt securities sooner or later mature. Thus, the ECB’s balance sheet should naturally shrink as governments repay their debts.
But this is not the case because of “reinvestments”. These mean that as soon as it is repaid, the ECB immediately reinvests this money to buy new debt. So its balance sheet remains stable.
We can read in the communicated that these reinvestments will continue “for an extended period after the start of the rise in interest rates”. Regarding the Pandemic Emergency Purchase Program (PEPP), reinvestments will continue “at least until the end of 2024”.
The Governor of the Banque de France, Mr. Villeroy, moreover declared this morning that we must “be careful about quantitative tightening » :
“You have to be careful, because we don’t really know what the consequences will be. The FED, which had reduced the size of its balance sheet in 2018, had to stop because there were market effects that had not been anticipated.
The market effects being the fall of the stock market. Here we are, the time has come to share Christine Lagarde’s slight unease about whether the ECB will reduce its balance sheet:
On balance, rising government borrowing rates are more likely to force the ECB to pull out the latest addition to its toolkit: (“the transmission protection instrument”). As you will have understood, this tool is nothing other than the printing press…
Bloodbath for debt
One only has to look at the debt markets to understand that the FED and the ECB will soon be printing again. Why ?
Because the value of debt securities is collapsing. Why ?
Because inflation is much higher than what these debt securities are yielding.
Here, for example, is the US government debt market. It is down 23%. Unheard of since 1788:
The Governor of the Banque de France, Mr. Villeroy, has declared this morning that there is no obligation to raise rates by 0.75% at the next ECB meetings.
Same story on the side of the United States. The giant Blackrock fund expects the FED to announce a 0.75% increase followed by two other smaller increases and a stabilization at 4.75%.
Buy Bitcoin
The central bankers are turning their jackets around since ultimately the only long-term scenarios are:
Option 1: Central banks don’t print, bonds/stocks crash, financial system implodes. It is enough to see that Amazon has just lost 20% in a single day to be convinced of this.
In this scenario, pension funds (which mainly invest in government debt) will go bankrupt and pensions will no longer be paid.
Option 2: Central banks print more money and fiat currencies resume their march towards 0.
Option 3: Get rid of fiat money and save in bitcoin to ensure your old age in a sovereign way.
Let’s end by pointing out that Christine Lagarde didn’t say a word about the CBDC… And that Japan, always ahead, announces to borrow 39,000 billion yen ($264 billion). Brrrr….
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