The first rise in interest rates by the European Central Bank (ECB) in eleven years will be on July 21 and will place the price of money at 0.25%. In September the second will take place, which could be 50 points, up to 0.75%. And then, depending on how the relentless inflation evolves –which closed May at 8.1%–, new increases will arrive until the objective of settling at around 2% is guaranteed, as established by the ECB’s mandate.
Christine Lagarde, president of the ECB, chose yesterday to be clear and forceful. Without reaching the level of Mario Draghi, her predecessor, her messages provided certainty and a defined roadmap that allows us to conclude that the ECB is finally serious. With a 100% hawkish tone – hawk, as the guardians of monetary orthodoxy are known – Lagarde and the governing council meeting in Amsterdam satisfied this time their traditional critics from central and northern Europe. The decisions were adopted unanimously, but HSBC titled a note to its clients thus: “Falcons take control”. The Bundesbank breathes.
The engine of change is the current mess of prices, runaway after the pandemic, the Russian aggression in Ukraine and the energy crisis. The upward spiral does not stop and the ECB revealed yesterday that it forecasts annual inflation of 6.8% in 2022, 3.5% in 2023 and 2.1% in 2024. “High inflation is the main challenge for all of us,” Lagarde said, later admitting that “it will remain undesirably high for some time.”
Hence the announcements of concrete and strong rate hikes. The market did not expect such determination from the ECB and the yield on the debt of the eurozone countries shot up just after the announcement of its decisions. Italy’s ten-year bond went from yielding 3.4% to 3.7%, while the Spanish and Portuguese, paired, went from 2.4% to 2.6%. In contrast to the periphery, German bond yields changed only slightly to reach 1.4%. In short, risk premiums, especially those of peripheral countries, are tightening up. Without abruptness, but without pause.
Lagarde launched her particular whatever it takes –whatever it takes, the phrase with which Draghi cut off the debt crisis in 2012–, but it was not very credible. “We have to make sure that monetary policy is transmitted to the entire eurozone and that there is no fragmentation,” the banker started. “As we have already shown, we will deploy other existing instruments or those that are necessary to prevent fragmentation from impeding the proper transmission of monetary policy,” she added. The market lacked more specificity and that is why the massive sale of bonds and the boom already described in the yield of sovereign debt took place.
The stock markets felt the blow, with the Ibex losing 1.5%, somewhat less than the Eurostoxx (-1.7%) and the Milan stock market (-1.9%). Not only because of the rate hike, but because of the worsening of the macro picture. The ECB has revised its growth forecasts down to 2.8% of GDP in 2022, 2.1% in 2023 and 2.1% in 2024. The cut in the next two years is severe , although it is in line with other recent projections and with the quarterly data that is becoming known. The economy loses steam at forced marches.
That is another of the risks that Lagarde will have to deal with, who yesterday considered the extraordinary bond purchase program to have ended at the end of this month. It was the previous step to the rise in interest rates and the ECB did not disappoint. In this case, his margin of action was totally nil.
What will happen now? As Lagarde admitted, financing costs – such as mortgages, linked to the Euribor – have already been collecting the rate hikes that are coming and families, companies and states will pay more for money. Growth will slow down a little more and, if the war allows it, inflation will subside. The weakest will suffer. As usual.
