Lagarde, end of sacrilege

The European Central Bank has decided to go ahead with the half-point rise in interest rates despite the banking turbulence that began in the United States due to the fall of Silicon Valley Bank and aggravated in Europe with the collapse of Credit Suisse. The decision should not be interpreted as a blow to the hawks’ table. Suspending a measure decided since February could have been read as the certification of the crisis and a manifest distrust in support of the Swiss bank made public just a few hours before. The choice to contain the rise to the quart, compared to the 0.5 that the script dictated, would also have caused misgivings and, on the other hand, was not going to make a real difference.

What mattered most this Thursday in Frankfurt was the message, both the one written in the official statement and the one that Christine Lagarde would transmit in the melee with the journalists. And there were reasons to fear performance.

The French woman has suffered serious setbacks, especially at the start of her term. In March 2020, in the midst of the pandemic, she set the markets on fire by saying that the ECB’s role was not to “reduce risk premiums”, that is, to help member countries of the monetary union in trouble. Lagarde wanted to put pressure on governments to take the measures that correspond to them, but, at critical moments, a central banker must be forceful with firewalls and leave moralizing for another time. She had to rectify herself that same day in an impromptu interview to ensure: “I am absolutely committed to avoiding any fragmentation of the euro zone at a difficult time.”

This time Lagarde – and the ECB – have passed the test, a difficult test. In a scenario highly pressured by escalating inflation, Frankfurt has left the path of increases in the air if the banking turmoil persists or worsens, the real gesture that the markets needed, beyond a quarter of a point above or below. Because what matters is the day after and that does require bankers to take it easy. Especially, when the bank shocks of these days —and the consequent distrust— are already going to result in a tightening of credit conditions and, in some way, they are going to do part of the thankless job of cooling the economy to combat inflation.

In addition, the ECB has promised to inject as much liquidity as necessary to face a financial crisis through “all the necessary monetary policy instruments”. The liquidity programs LTRO (the litrona, in the jargon of the euro crisis) are ready to be activated at any moment and it has suggested that they can also resort to the TPI (acronym in English of Transmission Protection Instrument), a tool that allows Frankfurt to buy a country’s debt if the financing cost differential shoots up (yes, to contain the risk premium, that sacrilege). He has not given figures either: that would have put a price on the crisis.

That is also the premise that can work for the Federal Reserve, which meets next week. A rise in the price of money of 0.5 points was expected, but analysts believe that it can be left at 0.25 or postponed. This time the ECB, as a welcome novelty, is the one who has set the pace for the Fed.

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