L’announcement fell: the European Central Bank raised its interest rates on Thursday by 0.50 points. The ECB thus confirms to maintain the pressure on Thursday against inflation, showing its firmness by announcing in advance that it would proceed with the same increase in March.
ECB President Christine Lagarde had killed the suspense in December, promising for February a second increase of 0.50 points in a row. But the euro guardians surprised by warning on Thursday that they would raise rates again by the same magnitude at their next meeting in March.
“Given the underlying inflationary pressures, the Governing Council intends to raise interest rates again by 50 basis points at the next monetary policy meeting in March,” announced the ECB. The three rates of the institution were raised Thursday in a range between 2.5% and 3.25%, the highest since November 2008.
The ECB is battling a massive price spike triggered by Russia’s war in Ukraine, which led it to launch a round of rate hikes in July, unprecedented in its scale and ending nearly a decade of money not dear. Unlike the American Fed, the Frankfurt institution believes that it is not yet time to slow down and slow down its monetary tightening.
Across the Atlantic, the Federal Reserve of the United States indeed raised its main rate on Wednesday for the eighth time in a row, but slowed the pace compared to previous increases.
Despite “weak global activity and high geopolitical uncertainty”, the euro area economy “is proving more resilient than expected and is expected to recover in the coming quarters”, thanks to “bottlenecks reduce” and “the gas supply has become more secure”, said Thursday the President of the European Central Bank Christine Lagarde, during a press conference.
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Objective: 2% inflation
While in the USA, inflation peaked in June 2022, the phenomenon is much slower in the euro zone: the rise in prices only peaked there in October, at 10.6%. In January, inflation in the euro zone fell for the third consecutive month, to 8.5%, more than expected by economists thanks to the decline in energy prices.
But it remains well above the target set by the central bank, ie 2% in the medium term. This is also a sham improvement, as “underlying” inflation (excluding energy and food) held at 5.2% at the same time and “is expected to remain stubbornly high in 2023,” warns Fritzi Köhler-Geib, chief economist at public bank KfW.
In question, “the improving economic outlook, a tight labor market, substantial wage demands and a high proportion of European companies which expect sales prices to continue to increase”, according to the expert. .
The ECB has all the less scruples in tightening the monetary screw further as the euro zone should escape a recession this winter, thanks to a slight growth in GDP (+ 0.1%) in the fourth quarter of 2022, according to Eurostat. The current first quarter saw activity rebound in January, according to the PMI, thanks to improving supply chains and the reopening of the Chinese economy.
And after ?
How far will the ECB rate hikes go? This is what economists will watch for in Christine Lagarde’s remarks at the upcoming press conference. The ECB statement leaves the door open to all options, indicating that future decisions “will remain data driven”.
But the institution also warns that it “will continue to increase interest rates significantly at a steady pace and maintain them at levels restrictive enough to ensure that inflation returns as soon as possible” towards the objective. The continuation of the monetary course is likely to revive the debate among central bankers divided between their objective to fight and the impact of their monetary policy on growth.
The hardline “hawks” now dominating in Frankfurt are expected to argue for keeping interest rates high, at least until 2024, while doves favor loose monetary policy.
One hour before the ECB’s decision, the Bank of England raised its key rate by 0.50 percentage point to 4%, the highest level since 2008, to counter inflation which still exceeds 10% in the United Kingdom.