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ECB panics as inflation runs out of control

Markets welcome surprise 50bp hike but question new bond-buying programme and ECB’s capacity to judge spread widening as unwarranted.

Christine Lagarde, president of the ECB. Photo: Reuters

An anti-fragmentation device sounds so much more exciting than a transmission protection instrument (TPI). The first phrase carries a certain military glamour; the latter brings to mind barrier forms of contraception designed to prevent STDs.

Economists and investors were impressed by the ECB suddenly terminating forward guidance with such extreme prejudice yesterday.

Yes, members of the governing council had previously declared that the ECB’s first rate rise in a decade would be 25 basis points and then delivered 50bp instead.

But that’s just as well. Inflation is out of control, coming in at 8.6% in June when the ECB had expected no big increase from 8.1% in May. The bigger-than-expected hike all the way up to zero was essential to give it any lingering hope of anchoring inflation expectations.

It may also support the fast depreciating euro and combat imported inflation.

“While we hoped for a 50bp rate hike, the ECB’s past rigour in keeping to its forward guidance did not leave us with much conviction,” notes Anatoli Annenkov, senior European economist at Societe Generale.


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