00:00Now, the European Central Bank has hiked interest rates for the second time this year,
00:04hoping to head off inflation pressure as the global energy crisis rolls towards its seventh month.
00:11The quarter-point hike takes the benchmark to 2.5%.
00:14ECB President Christine Lagarde says the eurozone has proven stronger than expected,
00:20meaning inflation is likely to stay above the bank's 2% goal for at least the next two years.
00:26And she's warned of potentially bigger energy shocks ahead.
00:30The energy shock could intensify further,
00:34and its effects on other prices and wages could be stronger than currently expected.
00:41Gas prices, in particular, could increase in the event of further supply disruptions
00:48or an unusually cold winter coinciding with low storage levels.
00:55Klaus Wistesen is Chief Eurozone Economist at Pantheon Macroeconomics.
01:00Klaus, thanks so much for joining us.
01:02Did the ECB really have any other choice but to increase rates?
01:07No, not really.
01:09Today's move was widely expected by economists, and it was also widely expected by markets.
01:15Obviously, the inflation data has been on the bad side since the last forecasts,
01:22and oil prices have rebounded, gas prices are rising again.
01:24So, no, this was pretty much a no-brainer, as Ms Lagarde herself said.
01:28Do you think these hikes are in danger of stuttering growth in any way?
01:35Because that's the real focus, isn't it?
01:38Well, I mean, look, there's always a risk to growth when you tighten financial conditions
01:42via interest rate hikes.
01:43Obviously, what the ECB said today and what we saw from the GDP numbers in the first half
01:47of the year, even if you take out the volatility in Ireland, is that it doesn't look as if the
01:52economy has taken it on the chin from either the energy shock itself or rising interest rates.
01:59Now, interest rates take a while to feed through to the economy.
02:02But for now, the message today very clearly is that the ECB is focused on upside risk to
02:07inflation, whereas the growth picture, I mean, they could be wrong.
02:10You know, they might be a little bit too optimistic, but the growth picture so far looks as if it's
02:14relatively stable against the backdrop of inflation, which we can see with our eyes,
02:18obviously, is much higher than everybody expected just six months ago.
02:23Yeah, and I want to know, from your view, where do you think we're going?
02:26June saw the first ECB rate increase since 2023.
02:29At their next meeting, they held off on a hike, and now we're seeing today's hike.
02:34Do you think we're going into a series of hikes, or do you think they're going to step it as
02:38they have been doing?
02:41We now see two more hikes in the ECB, and that's a big shift from us.
02:44We actually expected the ECB to kick back from the table today at 2.5 percent.
02:49But, like, I have the opportunity to kind of define a higher bar for further tightening.
02:54She didn't do that.
02:55Obviously, the inflation data is just – they're just ugly all day.
02:59All prices are up.
03:00Gas prices are up.
03:01So, we now think the ECB tightens further.
03:02We see a hike in December and another hike in February.
03:05However, we also see cuts at the end of next year.
03:09So, there's always two scenarios for the ECB.
03:11The ECB gets to some level.
03:13In this case, we thought maybe 2.5 percent and stays there and kind of rides it out.
03:17Or the ECB has to tighten more significantly, but also cut later.
03:21So, now we're in the latter scenario, more volatility in interest rates, which is great
03:25if you're a trader, but not so good if you are, you know, if you're refinancing your mortgage
03:30or if you're a company that's refinancing itself at the moment.
03:33So, you know, that's unfortunately the situation we're looking into with downside risk to growth
03:37as well, for sure.
03:39Christine Lagarde has got a plan to sort of rein in inflation, hopefully get close to the
03:43target range within the next couple of years.
03:45Of course, this all depends on a very volatile conflict in the Middle East and the oil price.
03:51How much comfort can we really take from her words?
03:55I mean, not much, right, because the ECB, you know, they're not wiser than you and me.
03:59I mean, obviously, today the ECB also introduced this idea of the crack spread, which is something
04:02we've been talking about for a long time now, that, you know, oil prices are 100, but diesel
04:07prices are equivalent to if oil prices were 150, because refining capacity is being curtailed
04:13by the war in the Middle East and the Ukrainian war with Russia, right?
04:17So there's a lot of supply-side stress in the economy at the moment, which is filtering
04:21through to consumer prices.
04:23And, you know, central banks are simple animals in a world where the economy is not in an outright
04:30recession, which is not the case at the moment, right?
04:32They're responding in the way actually the textbooks suggest that they quote-unquote should or will,
04:40which in a way, you know, my message today, if people are looking out, looking at this as
04:44investors is that we're probably back to the textbooks now, you know, we're modeling the
04:48ECB via the old reaction functions, Taylor rules, these types of things, because it actually
04:53suggests the ECB is now responding in a way that these kinds of models suggest they should.
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