Last week, ECB surprised by hiking policy rates by 50bps despite explicit guidance for a 25bps “first cautious step”. This hike takes the ECB Deposit Facility rate back to 0%, after being in negative territory since May 2014. Comments by ECB President Christine Lagarde suggested that the rates decision was the result of a compromise of the Governing Council, in order to reach unanimity on the antifragmentation tool (Transmission Protection Instrument, or TPI). Lagarde also mentioned rising inflation risks, including the increase of “some measures” of inflation expectations. Lagarde insisted that
the larger-than-expected rate hike did not imply a higher terminal rate and markets did not reprice the terminal rate higher which remained at just below 1.5%. Forward guidance was effectively terminated, the ECB is now in full data-dependent mode, and Lagarde refused to commit to anything for the September meeting.
Details about the anti-fragmentation tool were announced. The program will let it buy bonds from indebted countries such as Italy to cap any excessive rise in their borrowing costs, helping limit financial fragmentation within the Eurozone. In terms of assets, amounts and restrictions are not set, purchases will be “focused on public sector securities with a remaining maturity of between one and ten years”, while purchases of private sector securities “could be considered, if
appropriate”. In terms of eligibility, the ECB will consider a “cumulative list of criteria” which will be “dynamically adjusted”, including (1) compliance with the EU fiscal framework, i.e. no excessive deficit procedure; (2) no severe macroeconomic imbalances, i.e. no excessive imbalance procedure; (3) fiscal sustainability analysis from the European Commission, the European Stability Mechanism, the International Monetary Fund and other institutions, together with the ECB’s internal analysis; (4) sound and sustainable macroeconomic policies as submitted in the recovery and resilience plans for the Recovery and Resilience Facility and with the European Commission’s recommendations under the European Semester.
Energy in Europe
Natural Gas to Europe through the Nord Stream pipeline returned to 40% of capacity, their level before flows were halted for 10 days of planned maintenance. In Germany, gas-storage facilities are at about 65% capacity, short of the government’s 90% target. Putin indicated that flows could fall to 20% as one of the two working turbines goes for maintenance this month. The European Commission outlined its plan (“Save gas for a safe winter”) for a gas rationing. The plan asked for a
voluntary gas demand reduction target of 15% from August to March 2023 (compared to 5-year average of the same period). It is mainly focused on industries («non-protected customers»), as opposed to households and essential services («protected customers»). The share of Russian gas is not dominant in the whole national energy consumption (all sources combined) of the Eurozone but is still significant in Germany and Italy, where it accounted for 17% and 16%, respectively in 2020. For the Eurozone, the share of Russian gas as total energy consumption amounted to 10%.