From time to time, even on uphill slopes you have to step on the brake a little. After two consecutive increases of 0.75%, the European Central Bank has decided to soften the restrictive turn of monetary policy and has opted for a 0.5% rise in interest rates.
By slowing down the rate of increases in the price of money, the institution chaired by Christine Lagarde assumes that the inflation rate in the euro area, although it remains historically high, has reached its peak and that it does not want to run the risk of taking the European economy too much close to a recession, when there are still many uncertainties due to the war in Ukraine and the energy crisis.
After today’s intervention, the Central Bank of the euro zone will have raised the interest it pays on bank deposits from -0.5% to 2.5% in just four months, thus reversing a decade of ultra-lax monetary policy after seeing surprised by the sudden rise in prices. It is the highest level since 2008.
Currently, the inflation rate for the 19 countries that use the single currency unexpectedly fell to 10% last month from 10.6% in October. It was the first drop since June 2021, but it remains well above the ECB’s 2% target.
That’s how clear the ECB has been. “The Governing Council has decided today to raise interest rates, and expects to continue raising them significantly, because inflation remains too high and is expected to remain above target for too long.” In fact, the projections made today only estimate an inflation rate close to this level (2.4%)… for 2025.
In any case, the reduction in the rate of increase in the price of money must not be confused with an imminent end to the cycle of increases Indeed, the economists surveyed by Reuters anticipate that the ECB will raise the rate it now pays for bank deposits to 2% until taking it to 2.5% in March and 2.75% in June.
“The Governing Council considers that interest rates will still have to increase significantly at a sustained pace to reach sufficiently restrictive levels to ensure a timely return of inflation to the 2% medium-term target,” the statement said.
Indeed, we must not forget that inflation is still close to all-time highs and that real interest rates (precisely discounting inflation) are still negative: there is still room to go up if we want to reach 2%.
The ECB has been more precise about its announced plan to reduce the purchase of assets. “At its February meeting, the Governing Council will announce the detailed parameters for the reduction of asset holdings,” the statement detailed.
Specifically, it maintains that the decrease from March will be 15,000 million euros per month on average until the end of the second quarter of 2023 and that its subsequent rate “will be determined over time.”
In any event, the ECB is likely to remain prudent. “The euro zone economy could contract in the current quarter and in the next, due to the energy crisis, the high uncertainty, the weakening of world economic activity and the tightening of financing conditions,” admits the entity.
Although the recession may be mild, thanks in part to the massive support measures taken by European governments, too tight a monetary policy could depress economies. Something that is not in the strict mandate of the ECB, but that Christine Lagarde’s body would like to avoid in order to maintain economic stability in the eurozone.
The ECB is thus following in the footsteps of the United States Federal Reserve (Fed), which on Wednesday also opted for a half-point rise, to the range of between 4.25% and 4.5%, which means a slowdown after four consecutive gains, after the release of some better than expected US inflation data.
