For the Banque de France, “the rise in rates is over, barring surprise, barring shock”

2023-11-09 19:31:00

[Article publié le jeudi 9 novembre à 10H17 et mis à jour à 18H33, puis 20h30]

This might indeed be the long-awaited end of the tightening of monetary policy carried out by the European Central Bank (ECB) since July 2022. At least that is what François Villeroy de Galhau wants to believe. According to the governor of the Bank of France, “we are winning the battle once morest inflation and barring any surprises or shocks, the rise in our key rates is over”. An optimistic speech which he nevertheless qualified by adding that he was “too early to talk regarding falling”.

“I’m not saying: we’ve already won” the battle once morest inflation, added the one who is a member of the ECB Governing Council, while saying he was convinced that “we will bring inflation back to around 2% by 2025”. And to specify: “This applies to France as well as to the euro zone”.

An announcement which did not fail to breathe new life into the market. The Paris Stock Exchange ended up 1.13% on Thursday. The flagship CAC 40 index rose 79.50 points to 7,113.66 points, its highest closing level since October 11.

2% inflation target

However, inflation in the euro zone (the twenty countries to have adopted the single currency) has still not reached the 2% target, a threshold synonymous with price stability to ensure the balance of the economy, the main mission of the ECB. In October, its rate still reached 2.9% over one year, according to Eurostat. However, this is its lowest level in more than two years. It was 4.3% year-on-year in September and 5.2% in August.

ECB: how high should rates be raised to bring inflation down to 2%? And should we cling to this objective?

“If we look at the indicator on inflation, the process of decline has begun, summarizes Christopher Dembik”senior advisor in investment strategy at Pictet AM, estimating that “ the ECB would not be ready to accept a serious recession to reduce inflation to 2% “. Because this is one of the consequences of the shift taken by the monetary institution for more than a year which has slowed down both consumption and investment.

As a reminder, on October 26, although it announced that it would maintain its range of key interest rates between 4% and 4.75% – their highest level since the creation of the euro in 1999 – it had them increased a month earlier by 0.25 basis points in September… for the tenth consecutive time.

Risk of recession

Increases which weighed heavily on the growth of the euro zone estimated by forecasting institutes between 0.6% and 0.8% in 2023. Not to mention that “ governments now support economic activity less due to their public debts increased by the consequences of the health crisis and then the war in Ukraine », recalls Sandrine Levasseur, economist at the French Observatory of Economic Conditions (OFCE) – science Po.

Enough to continue to raise the risk of a recession for 2024. Germany, particularly in difficulty, saw its GDP contract by 0.1% in the third quarter when that of Italy stagnated, the two countries escaping narrowly heading into recession.

Eurozone: why Italy’s economy is doing better than neighboring countries

A respite that Austria did not have, which entered into recession with GDP falling by 0.6% following a decline of 0.8% the previous quarter.

The Czech Republic (-0.3%), Estonia (-0.2%), Lithuania (-0.1%), Portugal (-0.2%) but also Ireland (-1. 8%) also saw their economy decline. Spain saw its GDP slow down (+0.3%) once morest a backdrop of disappointing foreign trade results.

“We are starting to have indications that monetary policy is too restrictive”summarizes Christopher Dembik at The Tribune. “In France for example, with an inflation target of 2% and growth of 1.5%, the key rates should be at 3.5%”compared to between 4% and 4.75% currently in the euro zone, he explains.

Another illustration: “The fall in credits is worrying, especially over such a rapid period of time, which is also a good indicator of this overly restrictive policy,” the analyst further indicates.

Isabel Schnabel does not close the door to a new increase

However, not all members of the ECB board are convinced of the need to put an end to it. Isabel Schnabel asked last week not to “close the door to a further rise” interest rates on the potentially unstable path to bringing inflation back to 2%. “After a long period of high inflation, inflation expectations are fragile and further supply-side shocks can destabilize them, threatening price stability in the medium term”she estimated.

This is one of the arguments that remains in favor of a new increase: “ The volatility of inflationrecognizes Christopher Dembik. Today, we have visibility of the evolution of inflation in just three months “. Especially since the deceleration observed in recent months is mainly explained by the slowdown in the progression of energy prices. For its part, underlying inflation (excluding energy and fresh products in particular), although falling, was still at 7.5% year-on-year in the euro zone in October.

It therefore remains to be seen whether this is indeed the end of rate increases or simply a pause which might lead to further tightening by the ECB. The only certainty is that it seems impossible that it will opt for a rate cut.

“The money market considers that we will experience a first decline next June. But, from my point of view, this is too premature and these predictions contradict the ECB’s discourse which states that rates will be high for a long time. But “a long time” is not six months”tranche Christopher Dembik.

No rate cut in sight

Generally speaking, the era of low or even negative rates, caused by the eurozone crisis around ten years earlier, “is undeniably a finished parenthesis”he concludes, because “When you lend to a State, you take a risk and you expect to get a return on it. It is therefore an aberration to have negative rates”.

The ECB’s monetary policy should therefore continue to weigh on the economies of euro zone countries. Especially since it still appears difficult to measure the extent of the consequences of rate increases, with many companies having to refinance in the coming months, and therefore, at much higher rates than before. The real estate sector in particular is bearing the brunt of monetary tightening with a sharp slowdown in demand, with higher rates drastically reducing the number of loans granted. “Access to property in the short term over the coming year will be very complicated, particularly for first-time buyers who must now present a very significant financial capacity and contribution, which favors a certain category of the population”, notes Christopher Dembik. The solution : “the adjustment lever that we can imagine is a drop in prices, but it is not automatic, it can take time”nuances the analyst.

End of the rise in key rates: will real estate finally emerge from the crisis?

Likewise, the ecological transition is starting to suffer from the ECB’s fight once morest inflation. “For eight months, investments have encountered a certain number of obstacles due to the rise in rates and therefore the cost of borrowing to finance themselves. Projects, particularly in wind power, therefore find themselves delayed or even abandoned”, points out Sandrine Levasseur. Gold, “if the ECB increases its rates further, it is governments that will be called to the rescue to finance the ecological transition, which poses a concern”, she continues. However, investments will be necessary to achieve the objective set by the EU of achieving carbon neutrality by 2050.

On the other hand, in the United States, the hypothesis of a further increase is not excluded.

“We will not hesitate” to further raise key rates “if necessary” in the face of high inflation, warned the president of the American central bank (Fed), Jerome Powell, on Thursday. However, rates are at their highest in more than 20 years, but this may not be enough, according to him: the Fed “is committed to achieving a monetary policy that is sufficiently restrictive to bring inflation to 2.0%; we are not certain” that this is the case.