After many years of cheap money, the institution chaired by Christine Lagarde has been conducting a shock interest rate policy since the summer intended to cool economic activity.
The European Central Bank will once more raise its interest rates on Thursday and suggest other increases in the face of inflation remaining too high, especially as the improvement in the economic climate removes its scruples regarding tightening the monetary cap.
After many years of cheap money, the institution chaired by Christine Lagarde has been conducting a shock interest rate policy since the summer aimed at cooling economic activity, in the hope of taming the surge in prices triggered by the Russian war in Ukraine.
The return of relative calm to the energy markets allowed inflation to fall for the second consecutive month in December, to 9.2%, although remaining well above the 2% target. .
A fly in the ointment: “core” inflation – excluding energy, food, alcohol and tobacco – rose once more in December, to 5.2%. The rise in energy prices is contaminating the entire economy, while significant wage increases, to make up for losses in purchasing power, are expected this year.
In terms of good surprises, recent indicators are allaying fears for the European economy, which might escape this winter from a recession that was deemed inevitable only a short time ago.
Thanks to an improvement in supply chains, the reopening of China following health restrictions and government aid in the euro zone, activity recovered in January following six months of contraction, according to the latest PMI index from S&P Global. .
December Commitment
Between the resilience of the economy and the persistence of underlying inflation, Christine Lagarde “has no other choice than to reaffirm”, during Thursday’s monetary policy, “her commitment for the month of December to deliver a rate increase of 0.5 percentage point, which should continue in March,” Frederik Ducrozet, chief economist at Pictet, told AFP.
This new increase will bring the rate remunerating undistributed bank cash in credit to 2.5% and that on short-term refinancing operations to 3.0%, the highest since November 2008.
“The reason for a rate hike of 0.50 points is clear: the work of the ECB is far from over” to bring down inflation, summarizes Carsten Brzeski, economist at ING.
At the US Federal Reserve (Fed), further along in the monetary tightening cycle, officials anticipate more modest hikes of 25 percentage points at the end of this week’s meeting and then in March.
Signs of recession are strengthening across the Atlantic and inflation is slowing, suggesting “rate cuts later in the year,” ING economists believe.
The ECB will have to increase its rates “at a sustained pace” to reach “sufficiently restrictive levels”, that is to say penalizing for activity, and “stay there as long as necessary” to overcome the strong inflation, recently warned Ms. Lagarde.
Consumption is now at a high level, the institute will want to “supplement the absence of spontaneous correction of demand”, key element for the decline in prices, explains to AFP Gilles Moec, chief economist at Axa.
Inflation as a compass
While Thursday’s 0.5 point rate hike is clear, “the main topic of interest will be any messaging on how rates rise beyond that,” according to Andrew Kenningham at Capital Economics.
Opinions on the matter differ between members of the Governing Council of the ECB.
Among the “hawks” adept at a restrictive monetary course, the President of the Federal Bank of Germany Joachim Nagel would not be “surprised” if interest rates continued to rise following March, he told the magazine. Der Spiegel.
Among the “doves” advocating a more flexible approach, Fabio Panetta, member of the executive board of the ECB, said he was opposed to “any unconditional guidance” on rates beyond February.
The pace and timing of monetary tightening following March “will depend on the global economy, between slowdown in the United States and reopening in China,” concludes Mr. Ducrozet.
