There were no surprises. Word fulfilled. As the president of the European Central Bank (ECB), Christine Lagarde, announced on several occasions, the price of money in the euro area rose again this morning by a quarter of a point. Consequently, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will increase to 4.25%, 4.50% and 3.75%, respectively. This is the ninth consecutive rise. We are at the highest levels in the last 23 years, since May 2001. The hawks continue to set the tone, despite the progress shown by inflation in recent months.
The ECB in its note explains that the nightmare of inflation is not gone yet. “Developments since the last meeting support the expectation that inflation will continue to decline for the rest of the year, but will remain above target for a prolonged period. Although some indicators show signs of moderation, core inflation remains at levels , in general, high”, says the ECB.
It must also be considered that interest rates (3.75-4.5%) continue to be below inflation in the euro area (which is at 5.5%) and that this is well above the 2% target . Both factors formally induce the ECB to continue tightening.
Likewise, the fact that the labor market continues to maintain its strength suggests that the engine of the economy is still too hot and that perhaps it is better to cool it down a bit. Even so, economic activity has slowed down in the euro area, as evidenced by the PMI index data. The PMI Composite Index fell below the key 50 level for the first time in six months in June (49.9), and fell to 48.9 in July, lower than expected. Hard data paints an equally bleak picture, with both retail sales and industrial production disappointing in May. The first indicator has remained flat in each of the last two months, while the second registered its biggest year-on-year drop since October 2020 (-2.2%). But it seems that these signs are not enough to indicate that we are facing a turning point and that prices are under control.
“There are unusual delays in the transmission of monetary policy to the real economy this cycle. It must be taken into account that monetary tightening has not yet had its full effect and that central banks insist that the alternative would be much worse, because if it were to take hold Higher inflation, they would have to raise interest rates further, causing further pain in the economy,” Nadia Gharbi, Europe economist at Pictet WM, wrote in a note. “A further economic slowdown would make them more cautious, but even with greater confidence in the moderation of inflation, they may exaggerate their hawkish line. In any case, the ECB has to avoid increasing financing costs in weaker and more indebted economies and , at the same time, be credible against inflation,” he adds.
A difficult equation to meet, with which all eyes are now on September. Analysts believe that there should be another small rise and from there look at the data to see if it is necessary to tighten the screws further. For now, although there are more signs that the tightening is beginning to be transmitted to the real economy, core inflation – without energy or unprocessed food – may remain high and volatile and not lose enough momentum to justify a pause in rate hikes in September.
“Overall, in a similar vein to the Fed, the ECB is willing to do more, but also clearly believes that it is near, if not already, in its landing zone,” Charles Diebel writes. Head of Fixed Income at Mediolanum International Funds (MIFL).
The Dutchman Klaas Knot, considered a hawk and a hardliner, declared in early July that raising rates beyond this month “would be at best a possibility, but by no means a certainty.” As Ebury analysts wondered, “Are hawks molting?”
