The European Central Bank will once more raise its interest rates on Thursday, and suggest other increases in the face of inflation that remains too high.
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 downside: “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 resilience of the economy and persistence of underlying inflation, Christine Lagarde “has no choice but to reaffirm”at Thursday’s monetary policy meeting, “its December commitment to deliver a 0.5 percentage point rate hike, which is expected to continue into March”told AFP Frederik Ducrozet, chief economist at Pictet.
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 0.50 point rate hike is clear: the ECB’s job is far from done” to lower inflation, summarizes Carsten Brzeski, economist at ING.
At the US Federal Reserve (Fed), further along in the monetary tightening cycle, officials expect more modest hikes of 0.25 percentage points following this week’s meeting and then in March.
Signs of recession are growing across the Atlantic and inflation is slowing, suggesting “rate cuts on the agenda later in the year”believe the ING economists.
The ECB will have to raise its rates “at a brisk pace” to reach “sufficiently restrictive levels”i.e. penalizing for the activity, and “stay there as long as necessary” to overcome high inflation, recently warned Ms. Lagarde.
Consumption is now at a high level, the institute will want “compensate for the lack of spontaneous correction of the request”, 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 beyond doubt, all eyes are already on “the March meeting (which) will also feature a new set of forecasts” economic report the analysts of ING.
These inflation and growth forecasts “should strongly influence the decision of the ECB”, they point out. Opinions already diverge among members of the ECB’s Governing Council.
Among the “hawks” adept at a restrictive monetary rate, the President of the Federal Bank of Germany Joachim Nagel would not be “surprised” if interest rates continue to rise following March, he told Der Spiegel magazine.
Among the “doves” advocating a more flexible approach, Fabio Panetta, member of the Executive Board of the ECB, said he was opposed to “all unconditional guidance” on rates beyond February.
The pace and timing of monetary tightening following March “will depend on the global situation, between slowdown in the United States and reopening in China“, concludes Mr. Ducrozet.
