It was already known well before the press conference in the Amsterdam Hermitage that there will be an interest rate hike at the next policy meeting in July. There is also no doubt that there will be a repeat in September. But at 50 basis points (0.5 percentage point), the interest rate rise could turn out to be twice as high as previously thought. It will depend on how inflation figures develop in the coming months.
ECB president Christine Lagarde has only one person in her team who has ever raised interest rates, and that is Klaas Knot. When the president of De Nederlandsche Bank was allowed to sit down in Frankfurt in 2011, it quickly hit the mark: the main interest rate rose by 25 basis points in July that year. Now he flanked Lagarde as the organizer of this special press conference. Every now and then the ECB plays an away game to strengthen the bond with the citizen, this time it was in Amsterdam.
Inflation in the eurozone rose to 8.1 percent in May, well above the ECB’s target of 2 percent. The latter does apply in the medium term, which equates to a horizon of two to three years. The ECB expects inflation to fall to 2.1 percent by 2024.
energy prices
There is already one logical channel through which this decline takes place. If energy prices, the main drivers of inflation, stabilize at current high levels, they will gradually disappear from inflation data, as they only measure price changes.
That sounds like good news in itself, but it does come at a cost to the economy. Higher energy prices will then continue to take a bigger bite out of citizens’ disposable income than before, money that they can no longer spend on other things. In that sense, higher energy prices are a kind of tax on consumption, and rising oil and gas prices are ironically ultimately deflationary.
The ECB nevertheless expects the eurozone economy to grow by 2.8 percent this year and 2.1 percent in the two following years. She refers to the strong labor market, government support and the high savings that have been built up during the corona pandemic. The growth forecast has been revised downwards. In March, the economists of the central bank were still counting on 3.7 percent.
Despite the fact that growth is still in the pipeline, these are indeed painful times for some population groups. Or as the top woman of the International Monetary Fund, Kristalina Georgieva, recently said: ‘In economic terms, growth has fallen and inflation has risen. In a human sense people’s incomes have fallen and misery has increased.’