Trapped by inflation records, the European Central Bank (ECB) sent a strong signal on Thursday, September 8, accelerating the tightening of its monetary policy. The Governing Board of the Monetary Institute decided to raise reference rates by 75 basis points, for the first time in two decades of existence, in addition to a technical adjustment in 1999.
As a reference in a context of abundant liquidity, the interest rate on bank deposits at the ECB, reduced from −0.5% to 0% in July, thus fell to 0.75%. The other two reference rates, the one applied to banks in multi-week refinancing operations and the one aimed at the day-to-day marginal credit facility, stand at 1.25% and 1.50 % respectively. These rate increases should encourage savings and reduce consumption, to reduce pressure on prices.
The euro area runs the risk of “recession” for the year 2023 in case of “full cut” Russian gas deliveries, ECB President Christine Lagarde warned at a news conference. A “Pessimistic scenario” forecast prepared by the monetary institution, “including a complete cut off of Russian gas supplies”anticipates “a recession by 2023”she said. “We’re Almost There” after the closure of the Nord Stream gas pipeline, added Mme The guard.
Strong inflation for a long time
In July, the ECB had a firm hand announcing a surprise increase of 50 basis points, when 25 points were expected. This first increase in more than a decade came after a long period of cheap money helping to stimulate the economy. The promise was then to do the same in September unless inflationary pressures abated.
Gold prices rose in August to a record high of 9.1% in one year in the euro zone, well above the 2% rate forecast by the ECB. The new tensions in energy prices since the total stoppage of Russian gas supplies to Europe even portend double-digit inflation in the autumn. Therefore, the expected fall in prices will be long delayed, as evidenced by the new inflation forecasts revealed on Thursday, significantly raised until 2024.
The aggregate, according to the ECB, should rise to 8.1% in 2022, before slowing to 5.5% in 2023 and 2.3% in 2024. GDP growth of 3.1% is still expected this year , before falling to 0.9% in 2023. much lower than expected in the latest set of projections released in June.
More inflation and less growth: it is in this darkened context that the hard line defended in particular by the German Isabel Schnabel, influential member of the executive board of the ECB, weighed in the decisions of the day. you have to prove ” determination “ in the face of unbridled prices and this “even at the risk of weaker growth and higher unemployment”urged m.me Schnabel at the end of August. What matters is that the public maintains the “Confidence in our ability to preserve purchasing power”she insisted.
Until then, the dilemma between rising prices and recession fears has held back the ECB’s action, while other major central banks have started their rate tightening cycle. In the Governing Council of the ECB, a fraction of decision-makers defended an action “gradual” in terms of rate hikes, led by chief economist Philip Lane. But this clan turned out to be a minority despite the alarming news gathering in the euro zone.
The weakness of the euro, which sank below the $0.99 threshold on Monday, could have been another argument for a monetary hammer blow. A weak euro increases the cost of imported products, which fuels inflation.
US Federal Reserve (Fed) rates are already between 2.25-2.50% and a 75 basis point hike is coming on September 21st. The Fed must crack down on inflation to avoid the painful consequences for households of prices continuing to climb, as in the late 1970s and early 1980s, Chairman Jerome Powell said on Thursday. . “We think we can avoid the kind of very high social costs” that the Fed had, at that time, “had to impose to reduce inflation and establish a long period of price stability”, added the president of the US central bank during the annual monetary conference of the Cato Institute. The United States experienced a period of very high inflation in the 1970s, and this until the early 1980s. The increase in prices had been close to 15% in one year.
As for the ECB, this September it toughens the calls for others during the two meetings to follow before the end of the year, according to observers. However, an aggressive sequence by the ECB on its rates will increase the borrowing conditions of the euro zone countries considered vulnerable, such as Italy. Sooner or later the institute may have to bring out its new tool, unveiled this summer, aimed at nipping speculative attacks on debt in the bud, according to Holger Schmieding, an economist at Berenberg.
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