The European Central Bank board announced a fake monetary tightening today, starting with a 0.25-point rise of central bank rates on July 21. A second hike will follow in September, its increase dependent on inflation trends. The tightening is fake, because, as ECB President Christine Lagarde herself had explained last month, any rate hikes under the current inflation rate will keep monetary policy “neutral.”
The real issue is whether the ECB will keep buying sovereign debt from banks in order to prevent a Euro crisis. Today the ECB said that purchases will officially stop on July 1, but they might be resumed in order to avoid “fragmentation,” i.e., a major increase of the spread among Eurozone bonds. Firesales of Italian bonds started on Monday already, and a widening of the spread over the threshold was prevented by an invisible hand later in the day. In the last two months, 10 billion Euros have fled from Italian bonds.
Observers speculate that the ECB will act preemptively in order to avoid a repeat of the 2011 crisis, by supporting Italian bonds, but under heavy conditionalities, which will be made known later on.
