Is the ECB still credible? – 01/29/2024 at 08:04

At its last summit meeting in Frankfurt, the European Central Bank kept its interest rates unchanged. Continuing the fight against inflation, whether or not to deal with the complex international and geopolitical situation, internal criticism… For Jean-Paul Batbez, the central bank’s credibility is built and judged over time.

That is the question. The European Central Bank, as expected, did not cut its rates on Thursday 25 January. It left its interest rate for principal refinancing operations at 4.50%. It pegs inflation at 2.9% to meet its oft-repeated mandate of “2% over the medium term”. Other aspects of its policy regarding slow amortization of its securities portfolios (APP and PEEP) have also remained unchanged. So it continues, waiting for its restrictive policy to reveal its expected positive effects. According to him, wage growth will remain modest, reducing margins more than increasing sales prices.

So is it credible in its strategy to fight inflation, especially since it announces that it is avoiding recession?

Because, as usual before the decision, market panic about this maintenance of rates was growing, at a time when signs of weakening were worrying, with growth of -0.1% in the third quarter. The question increasingly focuses on the ECB’s “cautiousness” in view of this risk of recession, if not its reluctance. Asked about this risk at her press conference presenting the Monetary Policy Council’s decisions, Christine Lagarde quoted Janet Yellen: “Declaring two quarters of recession in a row means forgetting other statistics, especially employment”. And, in fact, in the euro zone, the unemployment rate rose from 6.5% in July to 6.4% in November. Will the argument be enough? Because we cannot forget that, during this time, the American economy registered +0.8% growth. So the criticism against the ECB’s conservatism is not over and it will depend on the upcoming surveys in a few weeks.

The credibility of the central bank is established over time

But we were also waiting for President Lagarde elsewhere, on his responses to the results of the “investigation”: the internal Union Ipsona, very negative results. The third exercise of its kind, after exercises on Jean-Claude Trichet in 2011 and Mario Draghi in 2019, gave him 53% negative opinions (compared to 23% positive) for 1,100 people. We are away from 64% positive decisions for Jean-Claude Trichet and 76% for Mario Draghi at the end of his mandate, with Christine Lagarde in the middle of them!

With confidence, she replies that in internal ECB surveys at least 80% of employees say they are not only satisfied, but even more proud, to work at and for the ECB. And it is not a question of people.

Perhaps the ECB’s credibility extends beyond inflation figures, to its ability to navigate the troubled waters of these times? Jean-Claude Trichet continued the path traced by BUBA, in a more uniform euro zone. Mario Draghi avoided the worst of the internal crisis, at the cost of… with BUBA! Christine Lagarde is managing a more complex and slower set, post-pandemic, with the ecological crisis, the global technological revolution, rising tensions with China, plus the war in Ukraine, plus between Israel and Gaza. Is it that simple?

A central bank’s credibility is established over time with the quality of its economy, its political support to ensure its independence, and the degree of independence its objectives and instruments give it. The ECB is new, its economy is slow and politicians are silent right now. But its German heritage: the single price objective against price and employment has become more burdensome for its rival, the American central bank. At each meeting, Madame Lagarde, like her predecessors, calls for an acceleration towards a banking union and towards a capital markets union, in other words towards more federalism. This is the ECB’s problem: an intermediate position for reasons associated with the political settlement of its birth that finds its limits when, as if by chance, nationalism rises.

Credibility of the ECB? More than ever, everyone’s business.