The European Central Bank (ECB) has decided this Thursday to maintain its roadmap despite the turmoil in the financial sector and raise interest rates by 50 basis points (0.50%), up to 3.50%. The high inflation, and its persistence, argue the increase. Between the lines, the president of the ECB, Christine Lagarde, said that if prices remain high, more increases will come.
The decision comes in full market turbulence after the fall of SVB in the US and doubts among European entities with the collapse of Credit Suisse and its request for liquidity from the Swiss central bank. The entity’s main objective is price stability. On this basis, it was almost forced to rise considering that inflation continues to skyrocket, at 8.5% in the euro area as a whole, far from its target of 2%. “Inflation is expected to remain too high for too long,” the entity says in the first sentence of its statement. “We are determined to fight inflation, to return it to 2%. There is no doubt about that. The determination is intact,” Lagarde insisted.
The stock markets have reacted with slight falls after learning about the rise in interest rates, even going into negative territory, to return to green moments later.
Inflation rules, and the French recalled that it is the great mandate, but it is not alien to the context. Both problems, price and market instability, will be tackled with their instruments, without giving up one to opt for the other. Thus, the ECB “is closely monitoring the current tensions in the markets and is prepared to respond as necessary in order to maintain price stability and financial stability in the euro area.” ECB Vice President Luis de Guindos has stated that the exposure to Credit Suisse is “limited”.
Doubts could harden access to credit and affect confidence, Lagarde said at the press conference. To counter this, its instruments (rates, purchasing schedules) will be adjusted as necessary “within our mandate.”
The ECB itself had previously announced that the rise would be half a point. The greater uncertainty that has been generated in recent days had led some analysts to see an increase of only 25 points as more appropriate, to then accelerate later. But changing the path set by the ECB could send signals to the market that something serious is happening, breaking its word and undermining credibility. The decision was not unanimous, but “with a large majority and made in record time,” Lagarde explained.
Beyond the rise itself, the focus is on the path of rate rises, as well as the speed with which it will take place. Currently, the forecast is for the reference rate to be around 4% by the end of the year. “Today’s ECB rate hike is likely to be its last big hike,” says eToro’s Ben Laidler, citing the forecast of more subdued inflation in the long term and the potential slowdown in the economy with industry doubts. financial. Lagarde has referred to the evolution of inflation for future movements.
In this sense, the entity has announced its forecasts for growth and inflation in the euro zone. They were prepared at the end of March, without taking into account “the recent appearance of tensions in the financial markets.” For inflation, the forecast is revised downwards and it is expected to be 5.3% in 2023, one point less than what was projected in December. It will drop to 2.9% in 2024 and 2.1% in 2025, five and two tenths less than in December respectively.
The underlying, which it looks with a magnifying glass to guide its monetary policy, is forecast at 4.6% this year, four tenths more. It will remain at 2.5% in 2024 and 2.2% in 2025, three and two tenths lower.
Regarding growth, it would be 1% in 2023, revised upward by half a point thanks to the drop in energy prices. In fact, the recession has been dodged, Lagarde said. 1.6% is expected for 2024 and 2025, below what was previously forecast (1.9% and 1.8%) due to the tightening of rates.
