What will you do this Thursday European Central Bank ? If analysts are to be believed, the ECB should accelerate the tightening of its monetary policy by deciding to raise rates on an unprecedented scale.
“We expect rates to rise by 75 basis points,” says Franck Dixmier, director of bond management at Allianz Global Investors, illustrating the shift in the consensus of observers who initially expected a 50-point increase in key rates. Such an increase would be a first for the monetary institute, in two decades of existence.
The surprise of July
“Given the level d’inflation and uncertainty regarding the future evolution of prices, there is less risk for the ECB to do more than to do less”, justifies Franck Dixmier. In July, it had a firm hand by announcing a surprise increase of 50 basis points, when 25 points were expected. This first rise in more than a decade came following a long period of cheap money helping to stimulate the economy. The guardians of the euro thus put an end to eight years of negative rates in one fell swoop by reducing the interest rate on deposits from -0.5% to 0%. banks at the ECB.
The promise was then to do the same in September unless inflationary pressures ebb. However, the opposite happened. Prices rose in August by 9.1% year on year in the zone euro. Inflation is thus well above the rate of 2% targeted by the ECB.
Towards double-digit inflation
The new tensions in energy prices even presage two-digit inflation in the near future. In this turbulent context, there remains within the ECB a fraction of decision-makers who still defend “gradualism” in terms of rate hikes, led by chief economist Philip Lane. But this clan “is in the minority”, remarks Bruno Cavalier, economist at Oddo.
Above all, the weakness of the euro, which sank below the $0.99 threshold on Monday, is another argument for a monetary hammer blow. A weak euro makes the bill for imported products more expensive, which fuels inflation. If a central bank is slow to adapt its policy, “the costs can be considerable,” admitted Isabel Schnabel, an influential member of the ECB’s executive board, at the end of August, acknowledging that the Bank had believed for too long that the inflationary shock would be temporary. However, the public must maintain “confidence in our ability to preserve the purchasing power ».
US Federal Reserve rates are between 2.25 and 2.50% and a 75 basis point hike is looming on September 21st. For the ECB, whose rates range between 0% and 0.75%, the turn of the screw should continue “until key rates reach a more neutral level, between 1% and 2%”, according to Frederik Ducrozet, chief economist at Pictet Wealth Management. A rate is said to be neutral when it neither stimulates nor slows down the economy.
