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ECB. Lagarde shoots inflation and wakes up the “ghost” of the debt of countries like Italy and Portugal – Observer

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ECB.  Lagarde shoots inflation and wakes up the "ghost" of the debt of countries like Italy and Portugal - Observer

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“We never make any prior commitments”. Gone are the days when the ECB, in the words of former President Jean-Claude Trichet (2003-2011), never agreed to a decision that it could (or could not) make in a few weeks or months. Continuing the style change brought about by Mario Draghi, the ECB, led by Christine Lagarde announced this Wednesday that does not change interest rates at the moment, but will raise them next month and again in September – and at the same time it can even be double: it is enough for inflation to continue without showing signs of improvement. However, by shooting inflation, Lagarde couldn’t help but wake up another “ghost”: The “ghost” interest on public debt in the countries of Southern Europe.

By the end of September, interest rates will not only come out of the negative “territory”, but may even become above zero. This has become the central monetary policy scenario, according to what the European Central Bank (ECB) said this Thursday. AS WELL AS this is new: whereas before this Governing Council meeting, analysts were divided on whether the ECB would raise interest rates by 25 bps in July and another 25 bps in September, or alternatively by 50 bps all at once in July, the scenario has now been changed to 25 bps basis points in July and another 50 points (half a percentage point) in September.

This does not even require worsening inflation forecasts. (cumulative) increase of 75 basis points over three months confirmed – it is enough that they do not improve, the ECB pointed out. And no one knows if they will improve, but the interest rate futures markets quickly began to gain not only those 75 points before September, but much more over the last three months of the year. In other words, with interest rates holding negative -0.5% this Thursday, the expectation became The eurozone will end 2022 with base rates around 1%, with a trend towards further growth next year..

Interest will rise. The increase in the monthly fee can be up to 100 euros

From Amsterdam (and not from Frankfurt, as usual), Christine Lagarde signaled that the interest rate hike, now announced in advance, “it’s not a step, it’s part of the journey“to fight inflation that will continue”undesirably high” and which is expected to end the year with an average (annual) value close to 7%, more than three times the target set in the central bank’s mandate. Even after September, the trend will continue with a “gradual and steady” increase in interest rates.finally leaving behind the long period of low (and even negative) interest rates that has characterized the last decade.

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But interest rates are not rising just because there is inflation and the need to “normalize” monetary policy after so many years of very low interest rates: the ECB has also tried to get the message across that the economy needs higher interest rates. has good prerequisites for growth in the “medium term” – and only the war in Ukraine hinders this process.

This note of optimism does not seem to be in line with the “major revision” made by the ECB regarding growth forecasts for the euro area: growth forecast for 2022 decreased from 3.7% to 2.8% and in 2023 – from 2.8% to 2.1%. However, this ‘Lost’ growth to partially recover in 2024estimates the ECB, which has improved its growth forecast for this year from 1.6% to 2.1%.

“Russia’s unjustified aggression against Ukraine continues to hurt the economy in Europe and beyond,” the ECB said, adding that because it “disrupted international trade, [a guerra]leading to material shortages and pushing up the price of energy and raw materials.” However, in this note of optimism, the ECB says that conditions for further growth of the economy, taking advantage of the economic recovery, a strong labor market, fiscal support and savings accumulated during the pandemic.”.

The euro failed to maintain its initial positive reaction to the ECB’s decisions and ended up falling against the dollar, which does not bode well for further inflation developments. SOURCE: Trading Economics

In terms of inflation, economists have begun forecasting a 6.8% rise in prices in the euro area in 2022 and then a decline in the annual inflation rate to 3.5% in 2023. In 2024 alone, the ECB’s medium-term target of 2.1% (target of 2%) is expected to be closer to inflation. “Moderating energy prices, improving global supply chains and normalizing monetary policy are factors that are expected to lead to lower inflation,” the ECB said in a statement.

High inflation is a huge test for all of usis indeed the first sentence of the ECB communiqué. “The Board of Governors will ensure that inflation returns to the 2% target in the medium term,” he assured then.

Rapid price growth, however difficult, is not the only enemy the ECB will have to contend with in the coming months. As Lagarde spoke in Amsterdam this Thursday, interest rates in countries in the south of the eurozone, such as Portugal and Italy, have picked up pace in recent weeks. 10-year interest rates in Portugal jumped 15 basis points to 2.66%.while rates in Italy rose 22 points to 3.69%. Italy debt risk spread against Germany up to 220 basis points (highest since May 2020).

This was due to the fact that the ECB did not provide more specific information on what tools can be used to avoid an overly sharp increase in the financial costs of these countries. And about two hours after the end of the press conference, it became known that “most governors” did not want to announce a specific answer to this problem. It was not Lagarde who said this, but the usual anonymous “sources” at the ECB, who usually speak to the main international financial agencies shortly after the presidential press conference (which often looks like a “settlement of accounts” with an official announcement). announced by the President a few hours earlier).

However, even when deprived of this “majority” to say anything more specific, Lagarde assured that the central bank will not tolerate excessive “fragmentation” of the eurozone. And he only added that the ECB is “watching” this movement and will act.”if it is needed“to ensure that there is no such ‘fragmentation’ of monetary policy, that is, that the policies set in Frankfurt lead to the same results in all jurisdictions. However, this healthy transmission will be threatened if, as happened during the sovereign debt crisis, countries have very different interest rates.

For example, with the difference in risks between Italy and Germany exceeding 200 basis points (two percentage points), there are clear signs that speculation is taking shape in the financial markets that interest rates in so-called periphery countries could rise to problematic levels. levels. “Fragmented financial markets will be a drag” on monetary policy, Lagarde said, ensuring that even after it was announced that new debt purchases ended on July 1, there was “flexibility” to apply existing instruments or develop new ones. “We have already demonstrated in the past that we are capable of doing this, and we will do it if and when the need arises.shot the president of the ECB.

Interest rates on debt in countries such as Italy (blue) and Portugal (green) have accelerated growth in recent months, widening the gap for Germany, whose 10-year interest rates have also risen, but below 1.5%. SOURCE: Trade Economics

The message was vague and clearly read from a cheat sheet. But while Lagarde tried to be assertive in the sense that she ensured that the ECB could intervene again in government debt markets “if necessary,” investors weren’t impressed. “The failure of the ECB to provide more details on its security plans [para este problema crescente] So this country debt risk premiums outskirts will continue to expand”suggested Andrew Kenningham, chief European economist at Capital Economics.

For Portugal, this will mean that future debt will continue to become more and more expensive, while new debt pays less than old debt that has expired in the last few years. This was the soil that gave the grapes: ECB market purchases that end at the end of the month have been achieved by Finance over the past 10 years. halve the average cost of all public debt, to almost 2%. But with rising interest rates in the financial markets, only by resorting to shorter terms can the state finance itself below this average level.

Interest will rise. The new debt is no longer cheaper than the old one

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Economy

ECB hands tied to fight housing boom, expert warns

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ECB hands tied to fight housing boom, expert warns

The European Central Bank (ECB) has its hands tied because its monetary policy tools are not enough to deal with a house price boom, John Mullbauer, a professor at the University of Oxford, warns in Real Estate Booms and Busts. .: Implications for Monetary and Macroprudential Policy in Europe”, released as part of the ECB Forum, which continues this Wednesday in Sintra.

The study concludes that there is little room for the ECB to “go against the tide” due to the heterogeneous environment among its 19 member states and therefore calls for a change in the models applied by the Monetary Policy Council led by President Christine Lagarde.

For a specialist, there is a direct relationship between the transmission mechanisms of monetary policy and real estate purchase and rental prices, which, in turn, indicates signs of a country’s economic health.

The paper highlights that financial crises are often preceded by easing lending standards and a subsequent increase in lending, as well as an increase in loans, accompanied by a sharp increase in property prices.

And at the epicenter of the housing crisis is the banking crisis. “There is an important relationship between lending conditions and non-performing loans (non-performing loans, i.e. non-performing loans). NPLs are important components of credit cycles. [e consequentemente] banking crises,” explains John Mullbauer.

NPLs are a problem for banks for several reasons. On the one hand, the lending institution may lose some or all of the funds it has loaned and no longer have the expected income from collecting interest and fees.

“This is a good paper. It is necessary to know how to calibrate monetary policy in moments of calm and more agitated moments. [para o mercado]”, comments Giovanni Del’Ariccia during the forum.

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The deputy director of the International Monetary Fund’s “research” department also insisted on distinguishing between what he classified as “good” and “bad” housing booms, citing growth or slowdown in employment in various sectors as a “good measure”. ., from construction to “communal services” between these two phenomena.

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Economy

The cost of living. Lisbon falls in the table and behind Madrid and Barcelona

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The cost of living.  Lisbon falls in the table and behind Madrid and Barcelona

The spread of telecommuting and flexible work, the war in Ukraine, currency fluctuations and widespread inflation are having a significant impact on employee pay, which could have serious implications for companies in the global battle for talent. Conclusion from the Cost of Living 2022 study launched by a consulting company Mercer, which estimates the cost of living in 227 world cities for expatriates based on a pooled analysis of the comparative cost of more than 200 items in each location, including housing, transportation, food, clothing, home and entertainment. Leadership again belongs to Hong Kong. Zurich (2nd), Geneva (3rd), Basel (4th) and Bern (5th) round out the top five most expensive places in the world for expats.


Thiago Borges, business leader at Mercer Portugal, said: “The volatility caused by COVID-19 and exacerbated by the crisis in Ukraine has added to global economic and political uncertainty. This uncertainty, which goes hand in hand with significant increases in inflation in much of the world, worries expatriates about their purchasing power and socioeconomic stability.”


Foreigners paid using the origin approach usually receive a living wage allowance to maintain their purchasing power in destination countries. This subsidy is calculated by applying a cost-of-living index to a portion of workers’ net wages (their “disposable income”, i.e. the amount they spend on goods and services used daily in their place of residence).


Both inflation and exchange rate fluctuations directly affect the purchasing power of workers working outside their country of origin. The rise of remote and flexible work has also forced many employees to rethink their priorities, work-life balance and where they live. These conditions could have serious implications for companies that need to rethink their mobility strategy to stand a chance in the global battle for talent. On the other hand, this situation also provides cities with an opportunity to attract foreign investment.

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“For organizations, the financial well-being of employees is a key factor in their ability to attract and retain the best talent, and with reliable and accurate data, organizations can define clear strategies for structuring their employee mobility packages. International players in unstable times”. , added Thiago Borges.


He adds: “Working and economic conditions around the world are evolving faster than ever before. Companies must carefully navigate international contract costs/packages during times of uncertainty and adapt to the new world of work to ensure business sustainability and a sustainable future for their expatriates. “, also noting that “companies need market intelligence and clear strategies to put into practice expatriate mobility packages that are competitive in uncertain times while ensuring the financial well-being of their employees, as well as business efficiency, transparency and fairness,” it said. Marta Diaz, Head of Compensation at Mercer Portugal, holds key talent,” he added.


Mercer cost-of-living data helps organizations understand the importance of tracking currency fluctuations and assessing inflationary and deflationary pressures on goods, services and housing across regions of operation. The data also helps define and maintain compensation packages for employees in international operations. In addition, the cost of living in a location can have a significant impact on its attractiveness as a place for talent and influence the decision of organizations to choose a location to expand and transform their geographic footprint.



TOP 10 most expensive


Mercer’s Cost of Living 2022 study places Copenhagen (Denmark) 11th in the world rankings, London (UK, 15th), Vienna (Austria, 21st) and Amsterdam (Netherlands, 25th) , as well as other well-known cities in Western Europe, in addition to the aforementioned Swiss cities of Zurich, Geneva, Basel and Bern.

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The most expensive city in Eastern Europe is Prague (Czech Republic), which ranks 60th out of 227 cities. It is followed by Riga (Latvia, 79th), Bratislava (Slovakia, 105th) and Tallinn (Estonia, 140th). The cheapest city in Eastern Europe is Sarajevo, Bosnia and Herzegovina, ranked 209th.


In turn, Lisbon, which has dropped 26 positions in the ranking, is now below the middle of the table of European cities, yielding to cities such as Madrid or Barcelona.







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Economy

Tech sell-off throws Wall Street to the ground – Bolsa

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Wall Street is drowning in recession fear.  S&P 500 at 14-month low - Stock Exchange

Major stocks across the Atlantic closed in negative territory and technology pulled Wall Street into the red. The report, which showed Americans more pessimistic about the outlook for the economy, didn’t help.

The Dow Jones industrial index fell 1.56% to 30,946.99 points, while the Standard & Poor’s 500 fell 2.01% to 3,821.55 points.

For its part, the Nasdaq Composite Technology Index fell 2.98% to 11,181.54. Despite this, it was the downfalls of giants like Amazon and Tesla that mostly took place.

Operators have taken another “reality shower” following a disturbing consumer confidence report, Bloomberg reports. The barometer of consumer expectations for economic development, reflecting a six-month forecast, fell to almost a decade’s low, discouraging investors.

The data comes at a time when analysts are still optimistic about corporate earnings in the quarter that is about to end, as record net profits are forecast for the S&P 500 group of companies.

However, the bleak economic outlook pushed Wall Street’s major indexes into negative territory after gaining about 1%.

The quarterly recovery in asset portfolios also caused volatility in Tuesday’s session.

For strategists at Goldman Sachs, earnings forecasts for companies this quarter are overly optimistic, which the bank says puts stocks at risk of further losses as Wall Street analysts cut their estimates.

Max Kettner, strategist at HSBC, also believes that stocks are not yet reflecting the impact of a potential recession and corporate results expectations are likely to be revised down.

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