At the European Central Bank, “hawks” Olli Rehn (Finland) and Villeroy de Gallo (France) raised their voices

In the European Central Bank, uncertainty looms over the question of raising interest rates and we will eventually get used to this air ballet between “doves” and “hawks” (the “doves” in favor of big support from the economy still dominate the “hawk” clan of followers more restricted competition).

Thus, Christine Lagarde was worried on Saturday about the risks of stagflation in the eurozone, but, who wants to be “neither a dove nor a hawk”, was silent about a possible imminent tightening of monetary policy led by the European institution. Headquartered in Frankfurt, Germany.

She was speaking the day after an interview with the Italian daily No Stampa Written by Fabio Panetta, Member of the Executive Board of the European Central Bank, Everyone who stands on the side of the “doves” said that In the context of slowing growth and rising prices “complicates choices” Euro guards, because Monetary tightening aims to contain inflation It will end up holding back already weak growth “.

For Oli Ren, we must prevent inflation from entering and consolidating

But since then, the hawks seem to be waging a real assault in the corridors of the European Central Bank. After Governor Villeroy de Gallo, last Friday, it was the turn Finnish Oli Ren to give a voice. On Monday morning in the German press, the Finnish central bank governor also called for an ECB increase in interest rates, and “quickly”: from July when the eurozone is vulnerable to high inflation.

“We must prevent inflationary expectations from getting too tight,” this member of the European Central Bank’s Governing Council said in an interview with Die Welt newspaper, referring in particular to the Russian invasion of Ukraine.

“So it is important to send a signal in that direction. It is appropriate to raise the key rate in the third quarter, most likely in July,” he added.

In the May 5 interview for the Finnish daily Helsingin Sanomat, Finn explained:

“I think it would be justified To increase the deposit rate by 0.25 percentage points in July and lower it to zero in the fall. after that normalization [du resserrement] Monetary policy can continue gradually and proactively. »

For a member of the Executive Council of the European Central Bank, inflation “affects the psyche of the people” through proactive reactions to the consequences of inflation, and for this reason it must stabilize, and this goes through the normalization of monetary policy.

The apparent absence of wage hikes in the eurozone, unlike the US

However, Olli Rehn believes that the inflation outlook in the Eurozone is very different from that of the US, where the economy saw an overheating and inflation accelerated to 8.5% in March.

Average wage increases in the US are 6%. In the eurozone, the recovery continues, But the labor market has not recovered as quickly and wage increases have barely crossed 2%.»Helsingin Sanomat explains.

Why this difference? According to a member of the Executive Board of the European Central Bank, the eurozone economy suffers more from the war of Russian invasion than the American economy:

This means less wage pressure in the eurozone. Olli Rehn said the need to raise rates would be less as well, giving some points to the “pigeon” camp…

But, according to analysts, this situation will not continue: due to the significant rise in consumer prices, employees will begin to demand relatively large increases in wages. As a result, companies will have to transfer increased labor costs to the prices of the goods and services they sell, which will worsen inflation.

Inflation and war in Ukraine: great caution against the guards of the euro

Indeed, in the Eurozone, inflation has already risen very dramatically, reaching a historic level of 7.4% in one year in March, Well above the European Central Bank’s medium-term target of 2%.

This is the whole debate between “hawks” and “doves”, and this situation should prompt the European Central Bank to raise interest rates, like other major central banks, and yet the protectors of the euro are doing their best to slow down the decision-making process. The situation in Ukraine poses uncertainty in the near future. The lack of clarity about Vladimir Putin’s intentions drives them to the extreme.

The rate hike, which will be the first since 2011, It will be a major step in the ongoing process of accommodative monetary policy normalization being undertaken in response to crises, particularly those related to covid-19 from 2020.

Inflation, Ukraine: After the Fed, the Bank of England raised interest rates to 1%, the European Central Bank is under pressure

Villeroy de Gallo in favor of at least three price increases in 2022

Last Friday, François Villeroy de Gallo, president of the French Central Bank, said he supports returning the deposit rate to positive territory by the end of 2022. These observations indicate that this member of the Council supports the ECB governors at least three increases interest rates in 2022.

The European Central Bank is beginning to reduce its exceptional support for the economy, but the record level of the consumer price index and rising expectations of long-term inflation are prompting more and more ECB members to recommend a faster end to unconventional monetary policy tools.

Francois Villeroy de Gallo said the European Central Bank should initially halt its bond purchases at the end of June, and then raise the deposit rate at its “next” monetary policy meetings, without setting a date for when interest rates will start.

“Doves” begin to be convinced by “hawks”

Some members of the European Central Bank recently called for a rate hike in July, which was met with little opposition from the establishment’s “doves”, suggesting that a rate hike this summer was now the most likely option.

The Governor of the Bank of France said during a conference organized in Paris.

A return to positive territory for the deposit rate, currently at -0.5%, could imply Minus three quarter-point price increases by the end of the year. Francois Villeroy de Gallo added that the ECB should gradually move its nominal rate towards a “neutral” level, i.e. between 1% and 2%.

The level of inflation is the main justification for raising interest rates, with recent surveys indicating that inflation expectations are “lower and lower” anchored around the European Central Bank’s 2% target.

Containing inflation around 2%: the European Central Bank and the Banque de France “will do what is necessary” (Villeroy de Galhau)

Higher interest rates could also support the euro against the dollar, as weakness in the single currency supports imported inflation.

“The level of the euro is very important for imported inflation,” said Francois Villeroy de Gallo. “A very weak euro goes against our goal of price stability.”

Another point marked by the hawks’ camp, was announced last Tuesday by Isabelle Schnabel, a senior member of the Executive Board of the European Central Bank, in the German economic press.

“A rate increase in my opinion is possible in July.”

In the end, proponents of a quick end to emergency measures and the normalization of monetary policy of the European Central Bank score points, but fears of a serious economic policy mistake persist, hence this warning that may sound like a hesitation. .

(with AFP and Reuters)