(Bloomberg) — The European Central Bank should either delay or pare back this week’s planned interest-rate increase to avoid a policy error reminiscent of 2011, former Executive Board member Lorenzo Bini Smaghi told Boersen-Zeitung.
(Bloomberg) — The European Central Bank should either delay or pare back this week’s planned interest-rate increase to avoid a policy error reminiscent of 2011, former Executive Board member Lorenzo Bini Smaghi told Boersen-Zeitung.
The German newspaper published an interview with the Italian on Wednesday, the eve of a decision for which a half-point hike has been described by President Christine Lagarde as “very, very likely.”
Her remarks, however, came before the collapse of Silicon Valley Bank, which has rattled global markets and prompted investors to dial back bets on monetary tightening on concerns over financial stability.
“Postponing for one month or doing only 25 points would not be a problem if well explained,” Bini Smaghi told Boersen-Zeitung. “The financial contagion is equivalent to some form of tightening of monetary conditions. Sticking to the 50-point increase, as if nothing happened, means implementing a tougher stance than previously thought.”
The former central banker, who is now chairman of Societe Generale SA, made the parallel with 12 years ago, when the ECB raised borrowing costs only to undo the move as sovereign-debt turmoil engulfed the euro region.
“The ECB should avoid repeating the 2011 mistake, when it continued hiking rates without taking into account the growing contagion from the Greek debt restructuring,” Bini Smaghi said, according to the newspaper. “This precipitated the crisis and led to a policy reversal after a few months.”
Bini Smaghi spoke on a day of financial jitters in Europe as banking stocks slumped amid worries about the stability of Credit Suisse Group AG. The cost of insuring the Swiss bank’s bonds against default in the near-term has approached a level that typically signals serious investor concerns.
Another ex-ECB official, former Vice President Vitor Constancio, said Wednesday’s “free fall” in Credit Suisse’s share price extends contagion to European lenders, warning that central banks shouldn’t ignore signs from the markets and the greater likelihood of an economic downturn.
“The ECB should do at most 25 basis points and not the announced 50,” he said in a tweet.
Meantime, their former colleague Gertrude Tumpel-Gugerell urged the ECB to push ahead with its plans. The Austrian, who was on the Executive Board from 2003 to 2011, told Bloomberg Television that rising core inflation is a concern and that the Governing Council would be well advised to show a “steady hand” in lifting rates.
Given the backdrop of turmoil after the failure of SVB, Deutsche Bank AG economists said on Tuesday that the ECB will probably ditch its guidance and hike by only 25 basis points.
Traders’ bets are currently pricing a less than 50% chance of a half-point hike compared with almost 100% earlier.
People familiar with the situation told Bloomberg this week that while there’s likely to be stronger opposition to raising the deposit rate by a half-point, there’s no reason to believe at this stage that a majority of the Governing Council will be persuaded to change those plans.
Euro-area inflation figures for February showed underlying price pressures surged to a new record. The headline number itself — 8.5% — was much stronger than anticipated.
Data since then have showed French inflation revised up and Spanish data down. Final euro-zone numbers are due Friday.
–With assistance from Jana Randow, James Hirai, Alix Steel and Guy Johnson.
(Updates with ex-ECB policymaker in 10th paragraph.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.