2023-07-27 15:03:53
The European Central Bank (ECB) on Thursday (July 27th) raised its benchmark interest rate to its highest level since May 2001, while leaving uncertainty hanging over the future as the effect of monetary tightening is felt on the economy.
A year after kicking off the fastest rate hike cycle in history, by 4.25 percentage points to date, the euro keepers have stayed the course.
The 0.25 percentage point rate increase decided on Thursday, as in June, brings the bank liquidity deposit rate to the ECB, which refers, to 3.75%, the highest since the spring of 2001. C is the ninth increase in a row.
The ECB has also decided to reduce to 0% the remuneration of part of the banks’ reserves at its counter, which are mandatory, which will reduce the bill it has to pay in interest on the reserves which still represent several trillions of euros.
“Inflation continues to slow down” in 2023, but “should always stay too strong for too long”, justified the ECB in a press release detailing its decisions. In the euro zone, inflation is certainly down, at 5.5% over one year in June, but above all thanks to the decline in energy prices, and by remaining well above the 2% target set by the ECB.
Vague
The successive rate hikes are beginning to arouse fears. The policy of high rates is “risky” and could “prolong the phase of economic weakness in Europe and Germany that we are currently experiencing”the president of the Berlin institute DIW Marcel Fratzscher told a German media group on Thursday.
What’s next? The ECB will set its key interest rates “at sufficiently restrictive levels” And this “to ensure a return to inflation as soon as possible” to 2%, explains the institution. This does not allow us to conclude that a new rate hike is already looming for its next meeting in September.
The Governor of the Bank of the Netherlands, Klaas Knot, recently indicated that a new rate hike at the start of the school year is “at best, a possibility, but certainly not a certainty”. In September the institute will have new economic projections and will have taken note of the evolution of inflation until August.
Critiques
In the United States, the American central bank showed the way on Wednesday by deciding on a further increase in its key rate, by a quarter of a point to 5.5%, the eleventh since March 2022. The rate is at its highest high since 2001.
In the euro zone, the effects of the cumulative rise in rates are already perceptible: demand for credit, particularly from companies, reached its lowest level in 20 years during the second quarter, the ECB indicated on Tuesday. Problem: this comes at a time when companies need to invest massively to green their business and accentuate the digital shift.
The euro zone fell into a slight recession last winter, but the latest forecasts from the International Monetary Fund see the region’s GDP (gross domestic product) growing by 0.9% (+0.1 point) in 2023, despite a decline in Germany (-0.3%), the only G7 country that should see the recession last.
The ECB wants to slow down the economy so that companies and businesses give up raising prices, and that their employees moderate wage demands, which tend to fuel inflation.
Ahead of today’s monetary policy meeting, the ECB’s restrictive course was criticized in some fragile European economies. This policy could create “a more difficult situation for growth at European level”Portugal’s Finance Minister Fernando Medina said in mid-July. The head of the Italian government Giorgia Meloni had she criticized at the end of June the “simple recipe” of raising interest rates to fight inflation, fearing that “the cure proves to be more damaging than the disease”.
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