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The eurozone’s era of cheap money is over

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The European Central BankThe meeting of the governing board in Amsterdam is expected to take the first steps towards ending the policy of negative interest rates and ending the bond-buying program. We’ll dive into four things to watch out for when Christine Lagarde speaks to the press this afternoon.

Meanwhile, the block of climate program Yesterday suffered a setback when the European parliament voted to weaken some draft legislation that is about to be negotiated with EU governments and the European Commission (although it maintains an outright ban on CO₂ emission cars by 2035). We will hear from internal market commissioner Thierry Breton, who has expressed disappointment over this development.

End of era

Christine Lagarde will call time on the euro zone’s era of super cheap money later today when the President of the European Central Bank is expected to outline a plan to stop buying more bonds and start raising interest rates. rate next month, write Martin Arnold in Amsterdam.

Most of the ECB’s 25 executive council members agree on the need to raise borrowing costs after inflation hit a record 8.1 percent in the eurozone in May – double the high previous all-time high and four times the central bank’s target.

However, there are still deep divisions over the speed and extent of interest rate hikes to bring inflation back under control. As the ECB’s rate-setters meet in Amsterdam this week to discuss its next move, here are four things to look out for:

  1. Interest rate:

    With the ECB already lagging behind the US Federal Reserve and the Bank of England, the key question for investors is whether it will raise interest rates by a quarter of a percentage point or a half when it meets again on July 21. Lagarde is expected to leave the door open. to a larger increase, while continuing to signal the interest started in a more “slow” way at 25 basis points.

    Anything Lagarde has to say about the size of the ECB’s first rate hike since 2011 will be closely watched by investors, with any sign of a more aggressive move risking selling. unload the bond market. “If the ECB turns out to be more unruly than expected, this could spook market participants,” said Allianz economists.

  2. Buy bonds:

    Lagarde has said the ECB will stop buying assets worth the remaining 20 billion euros a month at the beginning of next month – meeting a key condition for the start of rate hikes. Some ECB board members want it to stop buying more bonds immediately, but they are not sure this will happen.

    Another key question is how long the ECB will continue to reinvest the proceeds from maturing bonds. The Fed has already stopped doing this – it is shrinking its balance sheet – but the ECB said it will continue “for as long as necessary to maintain favorable liquidity conditions and a degree of monetary abundance”. This is “hardly justified any further”, raising the question of how long it will last, said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.

  3. New Instruments:

    The more important question for investors is what the ECB will say about its plan to deal with the risk of a bond market panic when interest rates start to rise. The difference – or spread – between the amount Germany and Italy each have to pay to borrow over 10 years has risen to its highest level since the bond market fell at the start of the pandemic in 2020.

    “If needed, we can design and deploy new tools to ensure the transmission of monetary policy,” said Lagarde, which would mean buying bonds from highly indebted Southern European countries to finance monetary policy. address any sudden increase in borrowing costs that could trigger a debt crisis. Some price sets supported the addition of a similar undertaking to the policy statement it released on Thursday, without giving further details on the mechanism.

  4. Forecast:

    There is broad consensus among economists that the ECB will cut its growth forecasts and lift them up due to inflation over the next three years. Underscoring how badly they have underestimated price pressures recently, Berenberg chief economist Holger Schmieding predicts the ECB will raise its 2022 inflation forecast by nearly 2 percentage points for the second straight quarter. , up to 7%.

    Investors will also be watching to see if Lagarde places more emphasis on upside risk to inflation or downside risk to growth. The first signal will be a hawk that the rate may need to move higher than investors expect, while the second will send a more dovish message.

Chart du jour: The challenge on the left

Jean-Luc Mélenchon, who served as Emmanuel Macron’s left-wing challenger in the presidential election, took advantage of public frustration with traditional politics to create a leftist coalition that could win a majority of seats in this month’s parliamentary elections and upset Macron’s legislative agenda.

Weak hands

Industry Commissioner Thierry Breton was among the first to react to frustration as the European parliament undermine its own position ahead of upcoming negotiations on legislation that aims to reduce the bloc’s carbon footprint by 55% by 2030, writes Andy Bounds in Brussels.

The main piece of legislation that congress seeks to reduce water is to expand an existing system that makes heavy industrial polluters pay for their carbon emissions. The European Commission has proposed expanding that system to include commercial and private real estate, in a bid to spur efforts to increase energy efficiency in buildings.

But in the face of current pressure from rising inflation and record-high energy prices, parliament yesterday voted to exclude housing from the emissions trading system (ETS).

The MEPs also failed to agree on the imposition of a carbon border tax – designed to charge importers’ emissions into the EU – and the establishment of a social climate fund to mitigate the impact of the fix. carbon prices for poorer households.

The French commissioner told reporters he also has “some reservations” about expanding the ETS into housing (remember gilets jaunes move caused by climate-related fuel taxes?). But in the end, Breton said, he supported the commission’s proposal because “the green deal is so important.”

While parliament passed a complete ban on internal combustion engines from 2035 on, Breton hinted at potential compromises coming, as 600,000 jobs in the sector are at stake. In addition, Breton also pointed to the fact that other regions of the world will continue to buy internal combustion engines.

“Europe should continue to produce some of the key components for heat engines that you will sell outside of Europe. It is extremely important to help the ecosystem transition smoothly,” he said.

Breton also repeated calls for Europe to secure vital minerals for the production of batteries, solar panels and wind turbines, including by mining them at home. He will make a proposal after the summer break. “It’s more important than ever.” In some cases, such as magnesium, the EU is almost entirely dependent on China. “We need 15 times as much lithium by 2030,” he said.

What to watch today

  1. ECB Governing Council meets in Amsterdam

  2. Justice ministers and particularly internal market ministers meet in Luxembourg

Notable, can quote

  • Merkel’s backlash: Former German chancellor Angela Merkel has spoken publicly about the war in Ukraine for the first time since she left office, defending her Russia position in statements that caused a fierce reaction from Ukrainian officials.

  • Regrets, but not apologies: On his first visit to Kinshasa, King Philippe of Belgium expressed “deepest regrets for past wounds” but refrained from a formal apology for his country’s decades of brutal colonial rule in what is now the Democratic Republic of the Congo.

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