ECB Preview & the Role of Energy

Macro Perspectives

The European Central Bank is due to raise rates today - Lagarde and the path of least resistance point towards 50 bps (although 75 bps has been rumored).

This will be the first time Europe has a positive deposit rate since 2013.

So, for nine years, we've paid for the privilege of parking our money at a bank in the euro area. Meanwhile, the buying power of that money is being eroded at a 9% annualized rate.

What is the mandate of the European Central Bank? Price stability. Clearly they aren't doing the job. At best, they will move the deposit rate up to 0.75% (less than 1%).

And remember, history shows us that beating inflation requires taking short term rates above the rate of inflation. Europe, like the rest of the world, isn't close. That said, as you can see in the chart below, there is no exuberance for higher interest rates to kill in the European economy.

Government policy-making in Europe has done the job for the ECB (crushing sentiment).

The common culprit here, like with the rest of the Western world, is energy policy (simultaneously, the driver of inflation and the destroyer of sentiment).