Led by Christine Lagarde for three years, the European Central Bank (ECB) raised interest rates for the first time in 11 years. A historic turning point. This decision marks the end of the era of negative rates that began in 2014. The main interest rate thus goes from zero, where it has been camped since 2016, to 0.50%, while that taxing part of the undistributed bank liquidity in credit, negative since 2014, rose from -0.50% to zero. Objective: lower inflation, which reached 8.6% in June over one year and should rise further in the months to come. Dother rate hikes “will be relevant”, their magnitude will depend “on the data”, the ECB said. For Christine Lagarde, who expects “inflation to be too high for a while”, the economic horizon “darkens” in the euro zone.
More expensive mortgages
The consequences for individuals are known: mortgages will cost more but, in return, savings products will yield more. Quoted by Le Figaro, Cyrille Chartier-Kastler, founder of the specialized site Good Value For Money, underlines: “We will see the emergence in the coming months of savings products that will take advantage of this new environment”.
The Specter of a Eurozone Recession
The guardians of the euro will however have to manage this credit crunch with caution, at a time when fears of a new debt crisis are resurfacing in the wake of political instability in Italy and the away from Mario Draghi.
Uncertainty about the supply of gas from Russia could also plunge the euro zone into recession in the event of a sudden halt in deliveries by Moscow. Raising rates too quickly could only worsen the situation. All of Europe is waiting in this context to know if the Nord Stream 1 gas pipeline will restore its deliveries, after more than 10 days of complete interruption for work.
Closing the gaps between borrowing countries
To ward off a possible surge in borrowing rates that countries like Italy, in the midst of a political crisis, must pay to finance their debt, the ECB will also unveil on Thursday the outlines of a new “anti-fragmentation” shield.
It was designed to smooth out the differences between borrowing rates, or “spreads”, between risk-free borrowing countries, such as Germany, and other more fragile ones. Strict conditions of use must be defined, the guardians of the euro do not have the right to help governments budget.
But “a self-inflicted political crisis in Italy is the textbook case where the ECB should not intervene,” warns Frederik Ducrozet, chief economist at Pictet.
The American example
The ECB, with this increase in the cost of credit, is only following the example of the American central bank (FED) which has been increasing its interest rates since March. At the end of July, they could even be raised by 75 basis points.
Note that Japan has left its ultra-accommodating monetary policy unchanged, in line with the expectations of most economists, while significantly raising its inflation forecasts for the country.
(With AFP)