Faced with inflation that is “still too high”, the ECB raises its key rates to unprecedented levels, economic growth forecasts revised downwards

2023-09-18 12:15:00

ECONOMY – The European Central Bank (ECB) increased its key rates on Thursday September 14, 2023 for the tenth consecutive time. A historic increase of 0.25% which brings these rates to the highest level since 1999. The Frankfurt monetary institution justifies this decision by its objective of reducing inflation in the euro zone. This was revised upwards in the forecasts for 2023 and 2024, to the detriment of economic growth, revised downwards.

Since July 2022, the European Central Bank (ECB) has been raising its key interest rates to fight inflation and bring it down to thresholds close to 2%, the objective set by the European treaties.

Policy rates are short-term prices, set by central banks and used to drive policy and control a country’s money supply. The first of these tools is the refinancing rate, which allows commercial banks to borrow cash. The second is the deposit rate which remunerates the reserves of commercial banks and the third is the marginal lending rate, which allows banks to increase credit to households and businesses.

The highest rate since 1999

On Thursday, the European institution announced a 0.25% increase in these financial tools. After reaching 4.25% in July 2023, the refinancing rate increased to 4.50%. That of the marginal loan increased to 4.75%. The deposit remuneration rate, which is the benchmark, is raised to 4%, a level never reached since the launch of the single currency in 1999.

A historic decision, certainly, but not surprising in the eyes of economists, who estimated the chances that the European Central Bank would raise these rates or maintain them at the levels announced in July at 50-50.

In its press release, the ECB estimated that this historic level would contribute to the decline in inflation. “Based on its current assessment, the Governing Council considers that key interest rates have reached levels which, if maintained for a sufficiently long period, will contribute significantly to the early return of inflation to inflation levels. objective”lit.

If the institution’s next decision depends on the evolution of economic data, the Governing Council has expressed its intention to “ensure that the ECB’s key interest rates are set at sufficiently restrictive levels, for as long as necessary”in the hope that the willingness of businesses and businesses to increase prices will be limited.

“Financing conditions have tightened further, increasingly dampening demand, which is an important element in bringing inflation back to the target level”explains the press release.

The argument of the Bank chaired by Christine Lagarde is not convincing since the increases in these rates since July 2022 have not had the desired effect. The objective of reducing inflation to around 2% is even far from being achieved. Good that she “keep slowing down”the rise in consumer prices “should always remain very strong for too long a period of time” and this, due to the impact of energy prices. Moreover, the monetary institution’s inflation forecasts have been revised upwards, with 5.6% in 2023 then 3.2% in 2024 before falling to 2.1% in 2025.

Taking out a loan becomes more complicated for households

The decision to increase or not the key rates at the same time aroused concern in the market, which feared a worsening of the slow-down of economic activity in the euro zone. A legitimate fear, read the press release from the Frankfurt institution: “Given the growing impact of this monetary tightening on domestic demand and the slowdown in international trade, the ECB services have significantly revised downwards their economic growth projections”. The bank expects 0.7% in 2023, compared to 0.9% previously, then 1% in 2024 and 1.5% in 2025. “We are clearly in a period of slow and sluggish growth”explains Christine Lagarde.

The increase in the ECB’s key rates is not without consequences on household finances. A higher refinancing rate means that banks, whose primary source of liquidity is the European Central Bank, must borrow at a higher rate from the monetary institution. To compensate for this more costly liquidity, financial institutions increase their own lending rates. It then becomes more complicated for households and businesses to take out a loan and consumer loans allowing the acquisition of vehicles or equipment, for example, are significantly affected.

Is this the last increase in key rates? The markets are interpreting the ECB’s announcement in this sense but Christine Lagarde refuses to make such a commitment and excludes nothing. “We cannot say that we have reached the peak”, she said Thursday.

Despite the press release from the European bank, the CAC 40, which was moving around balance, ended up 1.19%, returning to 7308.67 points. The Parisian star index returns to its levels of two weeks ago.