After fifteen months of increases and ten consecutive increases, in what has been the toughest upward cycle of monetary policy since the birth of the euro, the European Central Bank (ECB) decided yesterday to stop and not touch the price of money
Interest rates remain at 4.5% (the deposit facility at 4%), which remains in historical and statistical terms the highest level in almost two decades. The monetary authority had accumulated hikes of 450 basis points in just over a year. It has now reached pause mode. Unanimously.
Financial institution Ebury considers it very likely that the next rate move will be a cut and assigns less than a 10% probability to another rate hike in the coming months. “With a tight labor market and moderate productivity, we believe the risk of inflation not falling enough will prevent the ECB from considering any cuts even well into 2024,” said Ann-Katrin Petersen, of BlackRock Investment.
Because, at the moment, the biggest danger is that prices will rise again, rather than the eurozone falling into a deep recession. In the statement it is said that “inflation is still expected to remain too high for too long and that internal inflationary pressures will continue to be intense”. The general Eurozone CPI stood at 4.3% year-on-year last month, according to Eurostat, still well above the ECB’s 2% target.
Bad surprises could come from the Middle East. The president of the European Central Bank warned that increased geopolitical tensions may increase energy prices in the short term, which would create inflationary pressures and make the outlook more uncertain. Lagarde insisted that the war in Israel is “a source of geopolitical risk” and could reduce business and consumer confidence and spending and lower growth further.
In the subsequent press conference, the president of the ECB had to do an exercise in balancing. He assured that any debate about a possible cut now is “premature” and even recalled that the current shutdown does not exclude that in the future there will be more rate hikes in the event that the economic data demand it.
But, at the same time, he recognized that the European economy is “weak”. In fact, the purchasing managers’ index (PMI) indicators have been in contraction for five months in a row, which reflects a slowdown in the manufacturing sector. The ECB admitted that “previously agreed interest rate hikes continue to feed through strongly to funding conditions, which is increasingly dampening demand and helping with the decline in inflation”. The latter is the enemy to beat, “because it affects the purchasing power of the weaker classes”.
The vice-president Luis de Guindos did not want to comment on the tax on the extraordinary profits of the bank that the future Spanish Government that leaves the investiture intends to extend. “The bank tax must not harm its solvency or loans”, he recalled.
As an anecdote, Lagarde is halfway through her term. Regarding this, he assured reporters yesterday that he has no “remorse”, nor did he utter any mea culpa. She herself evoked in front of the journalists the famous song Je ne regrette, by Edith Piaf. They laughed at each other.
