Article for the Telegraph by Ambrose Evans-Pritchard
The European Central Bank has tightened monetary policy for the third time this century into the teeth of a deepening economic downturn, on this occasion with a surprise double-decker rate rise for good measure.
It has done so after it is already clear that Germany is in recession. The IFO Institute’s latest business climate index is shockingly bad: expectations plunged to 80.3, just a whisker shy of the absolute bottom in December 2008 after the heart attack of the western banking system.
Citigroup’s Christian Schulz says this level is consistent with a 20pc fall in investment over the second half of this year, subtracting 5pc from German GDP. He thinks the ECB may be “forced to reverse course”, just as it was after the mistimed tightening episodes of 2008 and 2011.
So does Adam Posen, a former UK rate-setter and now head of the Peterson Institute. Philip Rush from Heteronomics says the ECB is “hiking into the abyss”.
There is scarcely a flicker of internal, “demand-push” inflation in the eurozone, unlike the Anglo-Saxon economies where the labour market is tight. Core inflation is well-behaved at 3.7pc (viz 5.9pc in the US, and 5.8pc in the UK), and much of that reflects temporary energy costs in the supply chain. The bloc is nowhere close to overheating.
The pandemic spike in the eurozone money supply has already subsided. The money data has been signalling a serious slump for at least three months, which has a familiar feel for those of us who were tracking the figures before the Lehman crisis. Janus Henderson says its key measure - real non-financial M1 - has contracted at an annualised rate near 4pc over the last six months.
This is actually steeper than in 2008.
The ECB’s half point rate rise, more than flagged a week earlier, comes even though Brussels has in the meantime laid out drastic plans for gas rationing and a partial shutdown of heavy industry, acknowledging that Vladimir Putin is now going for the jugular.
It stated that a total cut-off of Russian gas is all but certain. On cue, Gazprom yesterday again slashed flows through the Nord Stream 1 pipeline - front page news in Germany, but not in the UK where many still seem to think it has little to do with them. They will learn otherwise since this country has subcontracted its winter gas storage to Europe.
Deutsche Bank thinks a total cut-off would cause a 7pc fall in German GDP from peak to trough. The International Monetary Fund thinks it would slice 5pc to 6pc off GDP in Italy and most of central Europe.
The facts are known. The ECB could have stuck to its pre-announced quarter point rise. It chose to tighten into this approaching disaster.
The ECB has a habit of hitting the brakes too late, too hard, and at the worst possible moment. It raised rates twice in 2011 just as the post-Lehman rebound was petering out, and just as southern Europe was being subjected to austerity overkill. It was this ill-timed monetary tightening that triggered the eurozone debt crisis.
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Christine Lagarde, President of the European Central Bank Credit: Michael Probst /AP
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