One rise now and another in a month and a half. As expected, the European Central Bank (ECB) has returned to increase the interest rates officials this Thursday in other 0.25 points percentages, in their eighth hike consecutive since last July he undertook the first in 11 years to combat the brutal escalation of the inflation. His governing council, thus, has led the 4% main rate (highest level since July 2008dawn of the Great Financial Crisis), while the deposit facility (the interest with which the central bank remunerates the money it keeps to the banks, the most relevant in the current context) reaches the 3.5%.
At his next meeting, he will raise them again except by surprise (predictably by another 0.25 points). “Are we done, are we done with the journey? No, we are not at the destination. Do we still have ground to cover? Yes. And I can go further: unless there is a material change in our base case, it is very likely that we will continue to climb the rates in July”, has confirmed its president. Christine Lagarde, thus, has affirmed that the council has not discussed “at all” a pause in the rate of increases like the one decided the day before by the US Federal Reserve. She has also denied that the ECB leadership has in mind to what level it will raise the rates: “We will know when we have arrived.”
The cause of all this, an inflation that despite having moderated will continue “too high for too long“.
Thus, its economists have revised upwards their forecasts on the rise in the general level of prices to the 5.4% this year, 3% next and 2.2% in 2025, compared to 5.3%, 2.9% and 2.1% that they calculated in March. That is to say, zoom out slightly of his objective of being at 2% in the medium term in a sustainable manner, which has pushed him to raise the price of money again.
The ECB is particularly concerned about the Underlying inflation (which excludes the more volatile energy and food prices). Thus, it has revised upwards its forecasts in this regard “given the unexpected increases above and the implications of the strength of the labor market for the rate of disinflation”. Now they forecast an average annual level of the 5.1% this year, 3% in 2024 and 2.3% in 2025compared to 4.6%, 2.5% and 2.2% in March.
less growth
The GDP of the euro zone has entered recession (it contracted 0.1% both in the fourth quarter of 2022 and in the first of this year), but the unemployment keep dialing record lows (6.5% in April), which gives the ECB room to act. Especially when the inflationAlthough it is moderating, it continues at very high levels. In May, it stood at 6.1%while the underlying -which excludes the more volatile prices of energy and food, as well as tobacco and alcohol- was in 5.3%. That is to say, in both cases very far from the objective of the central bank of the euro that they be at 2%.
The ECB estimates rate hikes “are being transmitting strongly to financing conditions and are gradually affecting the entire economy.” He now sees the euro area grow 0.9% this year, 1.5% the next and 1.6% in 2025, somewhat below the 1%, 1.5% and 1.6% estimated in March. The costs financing households, businesses and public sectorthus, have increased “sharply and loan growth is slowing.
Expected
The experts gave for granted this increase and also consider very likely an additional one of another quarter point at the next meeting at the end of July. Most analysts predict today that the body will end then the fastest cycle of rising money prices in its history, while some market voices do not rule out some rise additional after the summer There is more disparity of opinion about even when The monetary authority will maintain its policy in restrictive territory for the economy before approving the first rate cut.
“Although core inflation in the Eurozone surprised to the downside in May, the underlying pressures on prices remain firm. The economy from the euro zone it seems resistantinflation is still too high and the working market exceptionally tense“, pointed out Konstantin Veit, from PIMCO. “Despite the technical entry of the euro zone into recessioninflationary pressures remain persistent and the ECB must continue its monetary tightening to maintain your credibility and anchor inflation expectations in the market”, agreed Franck Dixmier, from de Allianz Global Investors.
Final stretch
The members of the leadership of the institution, thus, have been giving signs for some time that they are facing the final stretch of rate hike, although without tying their hands. “Much of the way of raising rates has been carried out and last part left, the final stretch. The amount and number of climbs of that final stretch will depend on the data that we are receiving, but a large part of the road has already been traveled”, pointed out a few days ago the vice-president of the institution, Luis de Guindoswho also advanced that “in the next three or four yearsthe types will be in a level environment relatively positive“.
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lagardefor his part, argued a few days ago that rate hikes have already hard notably the financing conditions of the eurozone, but there is still a “significant adjustment” to come due to the time it takes for rate increases to unfold their full effects. Financial conditions (such as the flow and price of bank credit or interest on public and corporate debt) have already picked up a good part of the effect of the increases, but the maximum impact of each increase in official rates on the growth is reached during the second year after its implementation, while the maximum impact on the inflation usually takes longer, between three and four yearsaccording to different ECB estimates.
Lagarde, in this regard, recalled that her body estimates that the rate hikes approved since July last year and the reduction of the institution’s balance sheet will have a medium impact of two points percentage less than inflation between 2023 and 2025 at the cost of reducing economic growth by an average of another two percentage points between 2022 and 2025. Despite these estimates, he has warned that the ECB must go ahead and bring rates to a level “restrictive enough” for economic activity, since there is still no “evidence” that underlying inflation (without the more volatile energy and food) has peaked.