Lagarde will win the rate hike pulse

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Lagarde will win the rate hike pulse
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The labor market in the euro zone has more slack than that of the US, and multi-year wage agreements stop the inflationary spiral

No central bank is an island, but the ECB will have to convince itself that it is at least semi-detached from the Fed. You have a good point.

The traders they have begun to count on the Fed raising rates four times this year, instead of three. This is having a domino effect. Euro zone money market prices showed on Wednesday that traders They expect Christine Lagarde to raise rates for the first time before September, and expect a second hike in December. Meanwhile, the return on the German 10-year bond crossed 0 for the first time since 2019.

Raising rates is not ideal, but ECB officials will be more concerned about money market moves that go against their guidelines. As its chief economist, Philip Lane, has said, rate setters expect inflation in the area to recede from the 5% peak and back below 2% in 2023 and 2024. So they don’t expect it to meet the criteria for uploading this year. The bank also expects to continue buying bonds throughout 2022.

It is true that central banks around the world misjudged the rise in inflation and its persistence, but reason is on the side of the ECB this time. Central banks ignore spikes in inflation caused by temporary factors, such as rising energy costs, and only worry if price pressures become widespread or translate into wage increases. That’s less of a concern in Europe than in the US For example, negotiated wages in the euro zone rose 1.3% in the third quarter, up from 1.8% in the second. While these figures predate price peaks, the bloc’s labor market is slacker than the US. Also, multi-year wage deals in countries like Germany make wages less likely to chase inflation as quickly. . Lagarde will have to launch a storm to convince the markets. They don’t seem to listen to her, but at least she has a convincing argument.

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