There is one year left for interest rates to start falling in the Eurozone. This was assured yesterday by the governor of the Bank of Spain, Pablo Hernández de Cos, in an event of the Financial Circle, chaired by Isidre Fainé, in the auditorium of the La Caixa Foundation, with the presence of the CEO of CaixaBank, Gonzalo Gortázar , and the president of the Economic Society of Friends of the Country, Miquel Roca.
These projections from the European Central Bank (ECB) are subject to high uncertainty. But they have two significant elements. One, that the price of money is still bound to rise, up to 3.75% (currently the deposit facility rate is at 3.25%). Two, that this level will have to be maintained during the following quarters before descending. This downward movement would only happen in the second quarter of 2024.
“We still have a way to go. Interest rates will have to remain in restrictive territory for a long period of time to achieve our objective in a sustained way over time”, explained Hernández de Cos during the speech. Therefore, the tightening policy of central banks is bound to continue for some time. Bad news for those who have to renegotiate their mortgage.
However, the governor introduced some noteworthy nuances. Regarding inflation, he said that “we have left behind the peak of the inflationary episode”, which in the eurozone was reached in November 2022. Forecasts even point to that in the second part of 2025 the long-awaited goal of an inflation of 2% is reached. This bearish trend is justified, in his opinion, by the drop in energy prices, the improvement of supply chains and the moderation of demand, as a result of the tightening of financial conditions.
Indeed, oil is below what it was trading before the Ukrainian war, freight prices have returned to pre-pandemic levels and even the FAO food price index has entered a downward phase until returning to at the end of 2021. And yet, underlying inflation “continues to register high pressures”, the governor acknowledged. De Cos offered a technical explanation: today we suffer the impact of the increase in energy costs in the production of goods from the beginning of last year, but a relaxation will be possible from the summer, because the transmission chain from costs to prices can take up to a year. He also noted that wage pressures have continued to intensify (in Germany public sector agreements are targeting 6%), which may be one of the reasons, along with robust business margins, why inflation it’s so hard to get off.
For example, he argued, remuneration per employee and hourly in the fourth quarter of 2022 in the eurozone increased by 5% and 4.3%, respectively. “As for margins, according to the National Accounts of the first quarter, companies would have continued to increase them in some sectors”, he acknowledged.
The governor also appealed to the different governments, many pledged these days in generous electoral campaign promises, to contribute effectively to fight against the runaway growth of prices.
“Public support measures should be temporary and should focus on the most vulnerable agents and adapt to the maintenance of incentives to consume less energy. Otherwise, we run the risk of increasing inflationary pressures in the medium term”, he warned.
