2023-12-14 07:10:54
Has Doctor BCE finished with his horse remedy? After raising its key rates ten times in order to fight inflation, the European Central Bank indicated in October that it was taking a break. Its president, Christine Lagarde, should announce this Thursday, December 14, that she will maintain this status quo.
To understand the stakes of this decision, we must go back to July 2022. Because behind this a priori abstract and complex notion of key rates, lies a powerful mechanism whose cascading effects are felt on our daily lives and even on our projects. life, such as buying a home, or even a car.
July 2022 therefore. Christine Lagarde announces an unprecedented increase, since 2011, in key rates to curb the rise in prices. This decision marks the end of a cycle started during the sovereign debt crisis which led the institution to lower rates to the point of dropping them to a negative level.
By raising them, the ECB, which sits in Frankfurt, pushes banks to increase the rates of the loans they grant. It becomes more expensive to borrow, fewer companies invest. As a result, the economy slows down and prices rise less quickly. Between July 2022 and September 2023, the interest rate on ECB deposits increased from -0.5% to 4%.
Growth slowdown
The effects of this rapid and brutal tightening of monetary policy are being felt today on the growth of the euro zone which is running out of steam: growth there will only reach 0.5% in 2023, before reaching 1% in 2024 , then supported by the recovery in Germany, according to projections from the French Observatory of Economic Conditions (OFCE) – carried out before the attacks on Israel by Hamas). The increase in key rates should cost the French economy almost one point of GDP in 2024 (0.9 point) compared to 0.4 point in 2023.
A major shock which raises questions about the relevance of the policy implemented in recent months by the ECB. Was she right to use the key rate lever? Has she gone too far? Opinions differ among economists. Some consider that the institution, whose mission is to ensure price stability, had no other option. Others believe that the rise in rates was too strong, or even that the remedy was not the right one.
Europe/United States: inflation of a different nature
To understand these criticisms, we must look at the nature of inflation in Europe, which differs from that observed in the United States. Across the Atlantic, the increase in prices was caused by the strong recovery in consumption. With demand being greater than supply, the label waltz has begun. The decision of the FED, the American Federal Reserve, to raise rates was therefore judicious.
In Europe, another scenario played out: inflation was fueled by the tension on energy with the war in Ukraine; using the key rate lever as much as the ECB did was therefore not adapted to this type of inflation, defend these critical economists. In their eyes, it was the action of the FED which forced the European body to do the same: without a rate increase, the European economy would have suffered capital flight, the euro would have plunged.
A first rate cut in June?
And now ? While on the inflation front the decline continues (it reached 2.4% over one year in the euro zone in November, close to the 2% targeted by the ECB) will the Central Bank lower its rates? Christine Lagarde should not make such an announcement this Thursday, December 14. It is a safe bet that the president of the institution will deliver a cautious speech to calm the euphoria that gripped the markets when they understood that the cycle of rate increases was over and that inflation was falling. The latter are banking on a drop in March or April.
Samy Chaar doesn’t believe it. The chief economist of the Swiss bank Lombard Odier drew up another timetable on November 16: it is likely that the ECB will reverse gear for the first time in June 2024; it would continue the decline in September and December. She would therefore pull the lever down before the FED. The American Federal Reserve would begin to reverse course in September 2024. Provided that inflation does not start again. A rebound in prices would disrupt these scenarios.
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