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Decisive meeting for the ECB. This Thursday, July 21, the European Central Bank is expected to launch its new “anti-fragmentation tool”, intended to limit the widening of the interest rate differential for government debt in the euro zone. The institution must also stem inflation as it reaches new heights,
Inflation, mainly due to rising energy prices, rose to 8.6% in June. A record that suggests that the ECB could raise its rates more than expected. Since its last meeting, the monetary institution has repeatedly said that it would raise its key rates by a quarter of a point. But she could go up to half a point. Is this enough to stop soaring prices without endangering economic growth? A compromise will have to be found.
It must be said that the expected tightening could affect consumers and businesses. However, according to the report commissioned by the Frankfurt Institute itself, banks in the euro zone tightened their criteria for granting loans in the second quarter. Households are already struggling to buy, especially real estate. The impact could also be more nuanced on the business side, believes Grégory Vanel, professor at the Grenoble School of Management.
The idea, by restricting access to credit, is to try to limit the increase in demand. The cost of the mortgage will be higher, but we have known for a long time that it is rarely first-time buyers who are able to afford real estate. So, will the idea of tightening bank credit for those who want to buy real estate on credit have an impact? It is possible, but it is not automatic. It is very likely that in any case, there will be fewer projects to finance and therefore if the actors themselves do not necessarily want to borrow more, the tightening of monetary policy in this case could be against -productive.
Grégory Vanel, on the impact of rising interest rates on households and businesses
A new tool to fight inflation
Christine Lagarde, the President of the ECB, will also have to reassure the markets in the face of the dangers which weigh on the financing conditions within the euro zone. A new common mechanism, called an “anti-fragmentation tool”, should in particular be presented in order to smooth out the differences between countries.
It should help some countries in poor health, such as Italy, to borrow under better conditions on the markets without increasing their public debt. The Frankfurt institute wants to prevent the difference between the ten-year rates of the member countries and the German rates, the famous “spread”, from being subject to speculation. But Pascal de Lima, chief economist of Economic Cell, an economic monitoring and analysis firm, is not sure that this will be enough.
In fact, I fear that these ECB defragmentation measures are ineffective and that, at the same time, we will simply have to give them up and implement austerity policies.
Pascal de Lima on the “anti-fragmentation tool”, the ECB’s new weapon
All this to avoid a new European debt crisis, as was the case in 2011.