Exceptional Publications

10 ECB: Why a minimal rate cut doesn't make sense right now

9. Just One Way for ECB to fully hit its Inflation Target?

8. The Solution to the Most False Conflict in History

7. The Paradox and the Solitude of the Monetary Policies of the ECB

6. How the Policy of Bank of England Makes ECB's 2% Inflation Target Impossible

5. Inflation Worsened by Central Banks and National Governments!?

4. Interest Rate Hikes of ECB to Cut Inflation: Are They a Bluff?

3. The Diversification and the "strange" Trade-off between Oil and Gas Prices

2. ECB's Restrictive Monetary Policy in 202 :  Harmful or Beneficial?

1. How to Bring Down Gas and Energy Prices Immediately and Realistically

September 1, 2024

We all are waiting for the ECB's decision on September 12 to cut again the interest rates and the doubt about that is:

By how many basis points is ECB going to cut the main interest rates?

Many argue that one shouldn't claim victory against a high inflation before the very end, reason why a 25 basis point cut should be the best solution.

I don't agree about this soft approach in consideration of the current global economic backdrop and I'll explain here below the reasons of my statement.

Let's suppose ECB sets a 0.25 point cut.

The first effect you'll have will be a raising Oil future value based on the expectations of the following stimulous to the economic activities that at least will keep the demand for oil at the same level as  the current one (so that a cut in the production of Oil by Opec +, needed to increase the price of the Oil, will be postponed).

As to the consumer spending on many goods  the effects will be minimal and the push to the economy very low.

Summing up the final effect will be a sort of inducted stagflation, the more enduring the more supply-driven (energy-related product driven) the inflation.

It is known that stagflation is a stagnation accompanied by an inflation level that is a bit higher than one compatible with a very slow economic growth.

You are not sure about this analysis since you believe the inflation is caused by the global demand more than it's by supply issues and as a result the impact on the demand of a 0.25 basis point will be stronger, aren't you?

If this doubt exists, then, a larger interest rate cut should be also providential!

How can it be so appropriate?

So far the ECB made no secrets about the data-dependent nature of its decisions but the extent of the inflation decrease due to the reduced demand is not clear and a a larger rate cut could reveal the "truth".

I will be more straight.

A 0.50 cut is enough to see a potential positive impact on the demand from the consumers for many goods and this increase will be the higher the less hit the consumer goods by the unavoidable Oil price increase, derived just as we have explained in the lines above.

The lapse of time to observe this results should not be  so short in consideration of the time needed for the cuts to be translated into the real economy.

After the appropriate lapse of time if the global demand for consumer goods increases to a good extent, it will mean that the inflation is really driven by demand factors; if not, the inflation is supply-driven.

That means in the best scenario case the economy will be stimulated in the right direction (net of geopolitical situations), while in the worst scenario case the ECB will have a real picture of the kind of inflation more than the one a multiple data analysis can achieve in order to be facilitated in making the most appropriate decisions in the future.

In the end a strong rate cut now is a win-win solution. 

March 20, 2024

Please look at these data showing the inflation rate year on year as of February 2024 EU, Country by EU Country.

What a difference!

Italy, Latvia, Finland, Lithuania are around 1%.

Portugal, Cyprus, Ireland around 2%.

Spain, Netherlands, France, Luxembourg, Germany, Malta, Greece, Slovenia around 3%.

Belgium, Estonia, Slovakia, Austria, Croatia around 4% or near 5%.

The reasons are clear enough to me!

1 - Different economic structures when you look at the economic industry distribution in each Country. You can find Countries where services have a percent weight more important than they have in others. This facet is important because the current  inflation also derives by the wage level growth that is different industry by industry.

2 - Different percent weight of import vs export when we compare EU Countries to each other and since most of inflation is generated by supply bottlenecks, this aspect is vey impacting.

3 - Different kind of import structure that is very relevant in particular in Country dependent on energy products imported from outside EU and that are affected by Ukraine-Russia conflict and the sanction policy on Russia.

4 - Different efficacy degrees of the transmission mechanisms of the EU's monetary policy into the single Countries as a result of the different actions taken by the national governments in charge in each of the EU Countries.

5 - Different cycles of Economic Growth Country by Country; some are growing more than others.

6 - Fiscal Policies different Country by Country.

At this point, can a single EU's monetary policy equally affect all the nations involved with the same degree and with the same expected timing?

NO, it cannot!!

The solution is  realistic:

Regrouping EU's countries according to some criteria that put together the ones that approach the same level.

One can think of the latest inflation rates recorded as the mentioned criteria and in so doing you can see up to 4 groups.

In reality, just as I explained above, the different inflation rates depend on many factors and their combinations they are the result of.

It would be better choose those factors for creating the groups.

In the end ECB could decide different actions.

Here is the procedure.

First Step is selecting the main factors causing the inflation as the criteria of distinction.

After that you can attribute a score to each of the criteria according to its single impact on the general inflation of EU area.

Final Steps consist of calculating the score of all the Countries involved, spotting 3/4 groups and putting thogether those countries that have the score falling into each group.

 A simplified example with this matrix:

Group 0-8: Countries J,L,O,R

Group 9-11: Countries A,E,G,H,I, K, M,N, P,Q,S

Group 12 Plus: Countries B,C,D,F

Once created these groups, EU shall be able to take more courses of "action", each of them good for each group and the countries falling into.

Visionary?

I don't think so. Just a radical change of course acknowledging that only by considering the differences a single goal can be pursued: an inflation rate that is almost the same for everyone.

Thanks President Lagarde for your steady attention you have been paying to this page.

Publishing date on this website: January 23, 2024

Publishing date on Linkedin: January 21, 2024

Writing date: July, 23 2023

What to say about the conflict between Ukraine and Russia!?

Just that it is the most avoidable conflict History ever known and that is impacting the world more that any other past war!!

Here attached you can find the framework that I think as the most appropriate to find the right solution.

October 8, 2023

Germany 

The German GDP is shrinking by 0.6% this year | Euronews

Excerpts in the focus

"According to five economic institutes who provide their common forecast twice a year, the country’s GDP is expected to decline by 0.6 in 2023, as rising interest rates take their toll on the economy and high inflation depresses consumption."

"Germany has been in a downturn for more than a year, mainly due to the sharp rise in energy prices in 2022. The loss of cheap natural gas sources such as Russia, put the country’s energy-intensive industries in a difficult situation."

"Consumer price inflation has made things worse, rising to over 8%, leaving domestic consumption at a low level. Meanwhile, the high interest rates hit the construction industry very hard."

Italy

Italy raises budget deficit forecast amid mounting economic pressures | Financial Times (ft.com)

Excerpts in the focus

"Italy’s 10-year bond yield rose 2 basis points to 4.8 per cent on Thursday morning, close to an 11-year high. The spread over the German equivalent increased slightly to 195bp, after Germany’s 10-year bond yield was up 1.3bp on Thursday."

"Consumer price inflation has made things worse, rising to over 8%, leaving domestic consumption at a low level. Meanwhile, the high interest rates hit the construction industry very hard."

EU as a whole

Eurozone 2024 fiscal tightening seen limited by slowing economy - GulfToday

Excerpts in the focus

"The eurozone’s central bank has been calling on governments to help curb price growth that is still more than 5%. While eurozone finance ministers agree, the ECB’s inflation problems are not always their top priority."

"Slower economic growth does not help. The Commission has cut its eurozone growth forecast to 0.8% in 2023 from 1.1% and to 1.3% in 2024 from 1.6%. The ECB is even more pessimistic, with a GDP forecast of 0.7% for 2023 and 1.0% for 2024."

After your reading the main conclusion is that it is common opinion and analysis the EU's Countries have been going toward a soft landing (or recession in some cases) and the Monetary Policy of ECB to cut inflation is without the desired effects and is worsening the situation, bringing about stagnation.

The previous articles on this page have highlighted how dealing with an inflation powered by the supply side as a demand-driven one is dangerous with regard to different aspects.

For instance, as a matter of fact European Central Banks hike the Interest Rates up trying to cut inflation while OPEC and RUSSIA cut Oil Production to make the OIL price higher to offset the potential decrease in its demand and the resulting decrease in its price following the potential soft landing caused by the Central Banks' hikes.

The result is an endless spiral.

At the same time, many indebted companies have been discharging, since ECB started to hiking the interest rates up, their higher financial expenses on the prices of their products and that's been happening mainly in some markets such as many ones concerning the goods of first necessity.

It goes without saying that the increase in interest rates are putting in trouble the most indebted coiuntries that see the returns paid on the their issued bonds increasing even more.

Those articles have also shown up the need for a cordination between ECB and Bank of England (BOE) because there is a strong need to reduce the imported inflation.

One positive thing taken from the readings I have proposed by attaching the above links is that ECB is becoming aware that  it needs some help.

At the moment this awareness materialized as a request to the national governments for some actions of them to reduce inflation.

I hope that this request doesn't hide the indication to tighten the fiscal policy in order to increase taxes.

As I wrote on page Economia e Altro at n. 14, in the Italian section, (Economia ed Altro | The Strategic Controller) the solution could be liberalize the Sales without limits and time intervals.

Some mechanisms would spread on the basis of which the dealers wouls sell larger quantities of goods at a reduced price (thanks also to an increased competition about the price) and as a result would order larger quantities of goods.

This large orders would allow to obtain important rebates on the goods bought by the detailers from the wholesalers.

The same mechanisms would materialize in the relationships between wholesalers and producers.

The more sensitive to price the end customers the more possible these mechanisms.

This would concern many, many supply chains.

Summing up, it's clear how ECB needs for a hand of the national governments.

Last but not least, I wonder how in this fight against the inflation Europewide the determination of the price to the end users of Natural Gas is different from one country to another.

If we think the inflation concerns mainly the Energy products, the present multiform legislations on the matter don't make sense.

That's even more true in consideration of the deep speculation existing in this market, as many experts know.