Historic decision in Frankfurt: for the first time, increase in interest rates by 75 basis points. Not even in the most exuberant moments of the 2000s was there a reaction so harsh: in July 2008, with the CPI at 4.1% and a euro trading above 1.3 dollars, the rate hike was modest (from 4.0% to 4.25%). To understand yesterday’s answer, to which we must add the 50 points of last July, we must take into account persistent inflation above 9%, if not also a euro at a minimum of the last twenty years, adding more firewood at prices. Is it decided enough?
The objective of the hikes is meridian: to depress activity, increase unemployment, reduce energy demand and juggle inflation. But yesterday’s will probably fall short: Lagarde acknowledged that, in the next sessions of the ECB, new rate hikes await us until, at the end of 2024, inflation returns to values ??close to 2%. Furthermore, public spending increases to contain the cost of energy for struggling households and businesses are not going to help either: in Britain, with Truss set to inject £130bn (more than 3% of GDP), it is already expect the Bank of England to raise rates to 3% in December and above 4% in March to offset that move. We did not experience this contradiction with Covid: in a context of price increases well below 2%, the support of the economy was complemented by a very broad monetary expansion. In any case, the rise is fine. But there has been no talk at all about reducing the nearly 5 trillion euros in debt (basically public) acquired on the markets; nor on the implementation of the program to combat financial fragmentation. There are no measures for later.
The ECB is very cautious: its action is constrained by severe restrictions. Some of the most important affect the financial stability of the eurozone, due to the loss in value of public bond portfolios held by banks, pension or investment funds, and insurance companies: as a result of last July’s rise, in August its average reduction has exceeded 5%. We will see the effects of the new increase in interest rates. And these losses, furthermore, go by neighborhood: the increases in the profitability of the debt are reflected with greater intensity in the southern countries, in particular but not only Italy, with the usual rise in risk premiums: those of Italy with Germany have gone from 100 basis points last November to around 240 these days.
Difficult times await us. And not only because of the effects of the energy crisis: the interest rates that we have enjoyed between 2015 and 2022 have already disappeared. And everything indicates that they will not return for a long time.
