Amundi Special Flash – Update on ECB rate hike
Until recently, monetary policy was of interest to only a handful of financial market experts and participants, who scrutinized the subtle nuances of central bankers’ words in an attempt to decipher the messages with their future decisions. The Covid-19 pandemic, a significant increase in inflation due to supply chain bottlenecks and geopolitical tensions has contributed to a notable shift in both monetary and fiscal policies. As a result, central banks are in the spotlight, especially in developed markets.
On Thursday 8 September 2022, the Governing Council of the ECB decided to increase the key rate by 75 basis points (1). This increase follows the 50 basis point increase on July 27, 2022 and brings the key rate to its highest level since 2011 (2).
During the press conference following the monetary policy meeting, ECB President Christine Lagarde explained that the decision had been made unanimously by Governing Council members in an effort to control inflation, which remains consistently above target. of the ECB (3).
The main objective of the ECB is to maintain price stability and thus to control inflation. The ECB has a specific inflation target, set at 2%. This goal is important for a multitude of reasons: low inflation means that individuals can easily plan their savings and spending, knowing that the purchasing power of their money will not change significantly from year to year.
Furthermore, targeting inflation at 2% provides a safety margin against the risk of deflation and leaves room to accommodate changes in inflation rates in euro area countries.
Why is the ECB so keen to keep inflation in check? In concrete terms, higher prices mean that we can buy fewer goods and services for the same amount of money. In particular, the goods we all need, such as energy and food, tend to have more “sensitive” prices and therefore undergo more pronounced increases in a shorter period of time. This has negative repercussions, especially for the most vulnerable parts of our societies.
The situation in the euro area is serious. ECB staff updated their projections. Now they expect inflation to average 8.1% in 2022, 5.5% in 2023 and 2.3% in 20243. Inflation is fueled by rising energy and energy prices. food, high demand for services and persistent bottlenecks in supply chains. Inflation could continue to rise in the short term.
Economic growth will also slow down. The new projections have been revised downwards for this year and next. The ECB now expects the eurozone economy to grow 3.1% in 2022, 0.9% in 2023 and 1.9% in 20243. This year’s decline is due to slowing inflation spending and production, weakening global demand and high levels of uncertainty.
To address this complex situation and try to reduce inflation, we can reasonably expect the ECB to continue to raise its rates, maintaining its muscle tone in the coming months. Ms Lagarde also indicated that increases are expected during “many of the upcoming meetings”. When asked about the number behind these “different ones”, Mrs. Lagarde indicated that “they would probably be more than two, counting this, but probably less than five” 3. Regarding the determination of the neutral rate for the ECB, Ms Lagarde provided little guidance, stating that the ECB will maintain a data-driven approach as the meetings progressed.
“There was a time, not long ago, when central banks were considered rather boring and unexciting. […] Some believed that monetary policy could be activated on autopilot. I can confidently say that those days are over, “said the then president of the European Central Bank Mario Draghi4 in 2013. The years have passed, but this phrase, in connection with the financial crisis of 2011, is still relevant.
(1) Source: European Central Bank, Monetary Policy Decisions, 8 September 2022
(2) Source: European Central Bank, Monetary Policy Decisions, 27 July 2022
(3) Source: European Central Bank, Press conference, 8 September 2022
(4) Speech by Mario Draghi, President of the ECB, at the “Room for discussion” of the SEFA Study Association and the Faculty of Economics of the University of Amsterdam, 15 April 2013.
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