Promises bind only those who receive them

This quote, given to former French President Jacques Chirac, could easily sum up the remarks made by Christine Lagarde during the July 21 European Central Bank (ECB) meeting.

Clément Inbona, fund manager, and Olivier de Berrange, director of information technology

Clement of Inbon
Clement Inbona, fund manager

First, because of the decision to raise key rates by 50 basis points (bps) against the 25 announced a few weeks earlier. To break out of an 11-year period without a rate hike, the Frankfurt bank decided to mark the ground in an unusual way to prepare the markets. Instead of firing off a flurry of weak signals, as is traditional, to prepare markets, the ECB decided to announce this first hike with care in timing and magnitude: +25 basis points, July 21. But, surprisingly, the increase is 50 basis points, the decision was taken unanimously. Thus, in just 6 weeks, the ECB disavowed itself and concealed its course of action. Faced with a situation that is more uncertain than ever in terms of inflation, weaknesses in economic activity, politics and geopolitics, the institution has decided to be forward-looking according to future economic data, thus plunging markets into an even thicker fog.

Olivier de Berrange
Olivier de Berranger, IT director

Then, through the expansion of his toolkit. An anti-fragmentation tool was developed over several months to avoid too large a gap between national rates. As for the shape, the contours of the Transmission Protection Instrument (TPI) were not clarified until the end of the press conference in a short press release. Therefore, journalists cannot find out its content. Should there be some concern in the Board of Governors when this mechanism is the result of a unanimous decision? The bottom is also dominated by fuzziness. The ECB has considerable discretion in deploying and calibrating the TPI, the criteria determining its deployment in a given country appear to be subjective and therefore potentially legally flawed. The political crisis Italy is mired in will no doubt amount to a full-scale crash test in the coming weeks if markets attack the interest rate differential between Italy and Germany a little more ferociously. , the level of which – 230 basis points – is approaching the critical threshold.

This reversal and these approximations can certainly be explained by the delicate situation in which the central bank finds itself: after slowly measuring persistent inflation and then delaying to act, the ECB may be trying to catch up in order to be able to face a recession. which is becoming more likely every week. Instead of defending its trust at all costs, the institution prefers pragmatism and responsiveness. Be better armed during the next crisis?


The reported information is the result of an internal study carried out by the management team as part of its UCI management activities and not a financial analysis activity within the meaning of the rules.

This analysis is based on the best sources we have and on publicly available information. They do not in any way bind La Financière de l’Echiquier and do not constitute investment advice.