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Frederik Ducrozet Profile picture
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Sep 13 • 4 tweets • 2 min read
🇺🇸 Narrator: it was transitory. Image
#transitory Image
#TransitoryButSticky Image
US CPI OER at 6.3% YoY and CPI rents at 6.7% YoY, highest in 36 years. Question is whether the usual lags still apply. Image

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More from @fwred

Frederik Ducrozet Profile picture
Sep 8
This (lack of) decision means the ECB will make *losses* on its refi operations, lending TLTRO at rates below the current deposit rate while remunerating bank excess reserves at the deposit rate.
Not a big deal, but we expecting a reverse tiering after @lagarde's comments.
This is because after a special period, TLTRO rates are calculated as the average deposit rate *over the life of the operation*, i.e. below the current deposit rate. Banks will now move all their excess reserves to the ECB's deposit facility to get +0.75% and lock in the spread.
Now the ECB decided not to penalise banks with a 'reverse tiering' that would have reduced the remuneration of reserves below a certain threshold. One explanation is that TLTROs are temporary, and the arbitrage will disappear in 2024 (55% of borrowings will mature in June 2023).
Read 4 tweets
Frederik Ducrozet Profile picture
Sep 8
🇪🇺 Historic decision: the ECB hikes policy rates by 75bp for the first time ever (*), to 0.75% for the deposit rate and 1.25% for the main refinancing rate.
ECB: "This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to the ECB’s 2% medium-term target."
(*) almost the first time ever:
Read 4 tweets
Frederik Ducrozet Profile picture
Sep 8
🇪🇺 Could the ECB hike by... 100bp?
Why not hike to neutral in just one go, if that’s the appropriate stance? 🧵
We expect the ECB to hike rates by 75bp. It’s all about preserving credibility at all cost, because a failure to act would lead to more pain in the future, as per @Isabel_Schnabel's Jackson Hole speech.
But why 75bp?
The Orphanides-Wieland difference rule (OW) estimates the appropriate change in the policy rate based on inflation expectations and the output gap using the Survey of Professional Forecasters (SPF).
Weak potential => aggressive tightening
Higher potential => gradual
Read 9 tweets
Frederik Ducrozet Profile picture
Jul 21
ECB's press release on the TPI.
ecb.europa.eu/press/pr/date/…
Asset purchases:
- not restricted ex ante
- focused on public sector
- with a remaining maturity of between one and ten years
- private sector securities "could be considered, if appropriate"
Eligibility: list of criteria to be "dynamically adjusted"
1) compliance with the EU fiscal framework (EC)
2) no severe macroeconomic imbalances (EC)
3) fiscal sustainability (EC, ESM, IMF, ECB)
4) sound and sustainable macroeconomic policies (EC)
Read 9 tweets
Frederik Ducrozet Profile picture
Jul 21
🇪🇺 ECB: last minute uncertainty. What a day to make crucial monetary policy decisions, ten years after you-know-who said you-know-what.
Today it's @Lagarde's moment.
Anti-fragmentation tool: it needs to be bold, for the ECB not to be forced into large balance sheet expansion, but it can't be used to address political instability. BTP volatility may help reach unanimity to avoid a March 2020 episode.
My big wild card remains more flexible reinvestments including for the APP. Not ideal (this was QE to boost inflation), but would considerably increase the ECB's firepower.
Read 7 tweets
Frederik Ducrozet Profile picture
Jun 15
Here it is!
Flexible PEPP reinvestments now, and tasking the relevant committees to design a new anti-fragmentation tool.
That's what markets needed to hear, finally!
Yes, this is what they should have said last week. Better one week late than never. Details will matter a lot, but now I can't see how they could not deliver by the next meeting.
I'm old enough to remember when the ECB was acting once the damage was done. The moves in rates over the past week had triggered them. They can still fix this.
Read 5 tweets

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