The financial markets are beginning to no longer believe the statements of the central bankers of the European Central Bank

The financial markets are beginning to no longer believe the statements of the central bankers of the European Central Bank, regarding their forward guidance of monetary policy. The assumption, in fact, according to which post-pandemic inflation could only be considered a temporary phenomenon, which has always been supported by the Frankfurt policy-makers, turned out to be totally unreliable when compared with the data relating to the increase in prices that it has been observed for almost a year now in the Eurozone.

The last survey of last week relating to the CPI on an annual basis showed a + 5.0% increase in the rate in December, from the previous + 4.9% and more than the expected + 4.7%, so that the current inflation rate is now at a level three percentage points higher than the target (symmetrical) set by the ECB, equal to + 2.0%. Those who expected, therefore, a cooling of the growth in prices due to the growth of infections due to the variant Omicron, was disappointed.

The error of assessment made by the ECB economists on the limited duration of the inflationary upsurge consequently loses the credibility of the central institution when it states that interest rates will not be raised in the course of 2022. It should be remembered, in fact, , that, at least according to macroeconomic theory, the only effective monetary policy to counter lasting supply-side inflation, such as the one we are observing, is to immediately raise the cost of money. Exactly the move that could soon make the Federal Reserve and which, instead, the ECB does not want to admit that it is forced to do.

The financial markets are beginning to no longer believe the statements of the central bankers of the European Central Bank

Financial markets, however, appear to believe that the ECB’s promises to maintain the current monetary policy stance are no longer credible. The proof lies in their trading choices observed in recent days on the eurozone sovereign bond market, which have been oriented on the sales side. This is the reason why most of the sovereign yields started to rise again, reaching new multi-month highs, as in the case of German BTPs and Bunds.

The yield curves of many of these securities are experiencing the phenomenon of the so-called “re-emergence” from the negative levels, in which they had been pushed during the last few years by the ultra-expansionary policy practiced by the Central Bank. The rise in the entire yield curve now follows the rise in current inflation and, evidently, also in future inflation, which is valued by the markets as higher than assumed by European bankers. If this attitude of traders continues in the coming weeks it is reasonable, therefore, to expect a further increase in sovereign yields. And never mind if some economists believed, just a few weeks ago, that those same yields would remain in negative territory for a few more years.