Taken by inflation records, the European Central Bank (ECB) sent a strong signal on Thursday 8 September accelerating the tightening of its monetary policy. The Monetary Institute’s Board of Governors decided to raise key rates by 75 basis points, the first in two decades of existence, apart from a technical adjustment in 1999.
Acting as a reference in a context of abundant liquidity, the rate on bank deposits with the ECB, which fell in July from -0.5% to 0%, thus fell to 0.75%. The other two key rates, that applied to banks on refinancing operations over several weeks and that relating to daily marginal lending operations, rise to 1.25% and 1.50% respectively. These tariff increases should encourage savings and reduce consumption, to reduce pressure on prices.
The euro zone risks a “recession” for the year 2023 in case of “total cut” deliveries of Russian gas, ECB President Christine Lagarde warned at a press conference. A “pessimistic scenario” forecast prepared by the monetary institution, “including the total cut of Russian gas supplies”anticipates “Recession for 2023”she said. ” We are almost there “ after the closure of the Nord Stream pipeline, added Mmyself The guard.
Strong inflation for a long time
In July, the ECB had a steady hand by 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 that helped stimulate the economy. The promise was therefore to do the same in September unless inflationary pressures eased.
Gold prices rose in August to a record 9.1% in a year in the euro area, well above the 2% rate set by the ECB. The new tensions on energy prices after the total shutdown of the Russian gas supply to Europe even portend double-digit inflation in the autumn. The hoped-for drop in prices will therefore be long overdue, as evidenced by the new inflation forecasts unveiled on Thursday, which increased significantly until 2024.
The aggregate, according to the ECB, is expected to rise to 8.1% in 2022, and then slow to 5.5% in 2023 and to 2.3% in 2024. GDP growth is still expected at 3.1% this year, and then plummeting to 0.9% in 2023, much less than expected in the latest series of projections published 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, an influential member of the executive board of the ECB, weighed on 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.myself Schnabel at the end of August. What matters is that the public keeps the “Trust in our ability to preserve purchasing power”He insisted.
Until then, the dilemma between rising prices and fears of a recession held back the ECB’s action as other major central banks began their rate tightening cycle. Within the Governing Council of the ECB, a fraction of the decision makers defended an action “gradual” in terms of rate hikes, led by chief economist Philip Lane. But this clan turned out to be in the minority even as alarming news was accumulating in the eurozone.
The weakness of the euro, which plunged below the $ 0.99 mark on Monday, could have been another argument for a monetary hammer blow. A weak euro raises the cost of imported products, which feeds inflation.
Federal Reserve (Fed) rates are already between 2.25 and 2.50% and a 75 basis point hike is looming on 21 September. The Fed must take firm action against inflation, in order to avoid the painful consequences for households of prices that would continue to rise, such as in the late 1970s and early 1980s, its president said Thursday. , Jerome Powell. “We think we can avoid the kind of very high social costs” that the Fed had, at the time, “It had to impose to lower inflation and establish a long period of price stability”, added the president of the American central bank during the annual monetary conference of the Cato Institute. The United States experienced a period of very high inflation in the 1970s, up until the early 1980s. The price increase had been close to 15% in one year.
As for the ECB, the September tightening calls for more during the two meetings to follow by the end of the year, according to observers. However, an aggressive sequence by the ECB on its rates will increase the debt conditions of eurozone countries deemed vulnerable, such as Italy. The institute may sooner or later have to design its new tool, unveiled this summer, intended to nip speculative attacks on debt in the bud, according to Holger Schmieding, an economist at Berenberg.