Ben Bernanke, a former Federal Reserve Governor, said that one day, as he was walking, he realized that the country had entered a recession. That is, two quarters with negative GDP growth. They were different times. On Thursday the 15th, the ECB president said that she only saw high inflation and for too long. And she only had one remedy: keep raising interest rates. And it increased them by 25 basis points: from June 21 it would refinance banks at 4%, it would give them marginal loans at 4.25% and it would pay 3.50% to banks with excess liquidity that deposited them with the ECB, and will increase them again in July.
No increase in interest rates from the central bank is good news because it can lead to further increases in the Euribor and increase the cost of mortgages for those who contracted them at a variable rate and also the cost of loans that companies have to request.
While money was cheap, the ECB bought sovereign debt from bank-owned members, offered banks auctions of cheap money, and bought the bonds they issued from large corporations. And because of the abundance of money, the banks that had excess liquidity and deposited it in the ECB coffers in Frankfurt had to pay increasing interest rates. All this led to a Euribor that until last November had been negative. What the executive committee is pursuing now is to get inflation back to its target of 2% in the medium term.
The bank has reduced asset purchases by 15,000 million and from July it will stop reinvesting the amount of bonds that come to maturity. Despite that, it will maintain its more flexible policy for the emergency fund bonds that were issued to deal with the pandemic. Those that come to maturity will be reinvested until the end of 2024. The bank estimates that average inflation in 2023 will be 5.4%; 3% in 2024, and may reach 2.2% in 2025. The ECB has revised its inflation projections excluding increases in food and energy prices, that is, core inflation. He considers that it can reach 5.1% in 2023 and drop to 3% in 2024 and 2.3% in 2025.
The war in Russia has led to eurozone growth of 0.9% in 2023, and possibly 1.5% in 2024 and 1.6% in 2025. Ukraine and Russia were the breadbaskets of Europe. Livestock fodder costs rose and put severe pressure on feed costs. Turkey’s negotiations allowed some cargo ships to leave the Black Sea and cross the Bosphorus to supply Mediterranean ports. To conclude, if fiscal measures were taken to reduce the public deficit and excessive indebtedness, it would be more likely to reach the medium-term inflation target of 2%.
