2023-06-15 19:40:26
The European Central Bank (ECB) has decided to increase interest rates again this Thursday to contain inflation. The Governing Council of the entity, meeting in Frankfurt, has agreed by a “vast majority” to raise the price of money by 25 basis points -as it did in May- and place it at 4%, levels that have not been seen since the crisis 2008 financial year and that are close to all-time highs. In addition, everything indicates that this eighth climb will not be the last. As warned by the president of the entity, the French Christine Lagarde, “if there is no base change, we will raise interest rates again in July” -it would be another 0.25%-.
The ECB acknowledges that Eurozone prices have fallen considerably. Data from the European Statistical Office, Eurostat, suggest that prices fell nine tenths in May and stood at 6.1%. The Eurobank points out, despite everything, that this rate will remain “high for too long” and is committed to ensuring that it is contained again below 2% in the medium term. «The possibility of stopping the increases is not on the table. We have not discussed it because we have work to do,” Lagarde stresses.
According to the most recent macroeconomic projections, inflation in the Eurozone will end the year at 5.4%, before falling to 3% and 2.2% in 2024 and 2025, respectively. This would mean that the ECB would have to wait at least three more years to achieve its price stability target of 2%. “We have not reached our destination, we still have to cover more ground”, he has limited himself to highlighting the rate hikes.
The pressure of underlying inflation – that which excludes the price of unprocessed food and energy – remains strong, “although some indicators show signs of weakness”. However, Lagarde points out that this rate “has not yet reached its ‘peak’.”
The increase in labor costs – due to the reduction in unemployment and wage increases in some Member States – have increased inflationary pressure, which has helped to revise the forecasts for this rate upwards. In this way, it calculates that core inflation will remain five tenths higher than expected during this year (5.1%) and next (3%), before falling to 2.3% in 2025. «Labor costs will have a critical role on inflation and has been one of the reasons that have led to the rise in rates”, highlights the French.
Impact on the real economy
The entity closely monitors this rate, in addition to the transmission of monetary policy to the real economy. For now, past rate hikes are “gradually” being passed through to the economy: borrowing costs have risen sharply, and the ECB argues that “tighter financing conditions are key to further lowering inflation.”
Several weeks ago, the German Isabel Schnabel – a member of the executive board – pointed out that this process “takes time” and that there is “great uncertainty” about the strength and speed with which its effects will be felt. In fact, the ECB points out that the “delay” in the transmission of its decisions to the real economy is between 18 and 24 months. This situation worries especially the countries of the East, where inflation exceeds double digits; but also to others such as Spain, Belgium and Luxembourg, where inflation is lower and rate hikes threaten to jeopardize economic growth.
Data on economic developments published this month by Eurostat suggest that the Eurozone entered a technical recession in the first quarter of 2023. The ECB has also revised growth slightly downwards and expects the economy of the euro countries to end 2023 with an increase of 0.9%, before rebounding 1.5% in 2024 and 1.6% in 2025. He maintains that he will continue to base his decisions on the evolution of inflation, the underlying rate and the effectiveness of the transmission of monetary policy, but it is “prepared” to adjust all its tools to ensure that inflation returns to 2%.
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