The "hawks" win: the ECB raises rates by 75 basis points

The “hawks” win: the ECB raises rates by 75 basis points

In the end, the hard line of “hawks“. There European Central Bank confirmed market expectations by approving an unprecedented rise in interest rates by 75 basis points (0.75%) in the hope of curbing the increase in prices. It is the second increase after the 0.5% rise in July and there will be several others, as confirmed by the president Christine Lagarde. The Eurotower statement explains the move with the need for “a timely return of the‘inflation to ours 2% target“. After the decision – taken unanimously – the European lists have all turned in negative. The fear is that the rise in interest rates, which explicitly aims to “curb demand”, increases the risk of recession for theEurozonegripped by the worst energy crisis ever and struggling with a stop to gas supplies from Russia on Nord Stream 1. The lawyer and former French minister tried to reassure, saying that a recession is expected “only in the extreme scenario with the stop at all gas importswith rationing throughout Europe e no compensation or alternative supplies“. But the admission that the ECB has macroscopically on price trends does not help wrong the forecasts: “We did mistakes and as ECB number one I take the blame, ”he said at a press conference, answering questions from journalists. “We understand the causes, and I can assure you that the staff is constantly updating, integrating what had not been taken into consideration so far”. For a long time, the institution considered inflation a phenomenon “temporary“.

The growth forecasts for the euro area have already been revised significantly downwards: the GDP is now growing by 3.1% in 2022, of the 0.9% in 2023 and by 1.9% in 2024. At the same time, the estimates on the rate of price increase were revised upwards: 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024 ″. Wholesale gas prices, Lagarde said, “will remain extraordinarily high” and “too food inflation it increased in August, to 10.6 per cent, partly reflecting the increase in energy-related input costs, disruptions to food trade and adverse weather conditions ”. All this, says the press release, is “reducing the purchasing power of income of people and, although supply bottlenecks are easing, they continue to limit economic activity ”. Furthermore, “the adverse geopolitical situation, especially theunjustified aggression of Ukraine by Russiaaffects the confidence of businesses and consumers “.

In this context, the fiscal policies of individual states are obviously crucial. But Lagarde warns that “budgetary measures to cushion the impact of rising energy prices should be temporary and aimed at households and businesses more vulnerable to limit the risk of fueling inflationary pressures, improve the efficiency of public spending and preserve debt sustainability. Structural policies should aim at increasing the growth potential of the euro area and supporting its resilience ”.

The rise in rates – Interest rates on transactions refinancing principal, on the marginal lending facility and on deposits at the central bank they rose to 1.25%, 1.50% and 0.75% respectively, with effect from 14 September. Further increases are expected probable but every decision will still be “data driven“, Explains the board, which took today’s decision” because inflation continues to be far too high and is likely to remain above target for a prolonged period of time. ” For now the Governing Council foresees new squeezes – “more than two but less than five,” said Lagarde – in upcoming meetings for “curb demand and protect from the risk of a persistent increase in expected inflation “.

The anti spread instruments – The board confirms the decisions on the new anti spread shield: “The tool of protection of the monetary policy transmission mechanism can be used to counter unjustified, disordered market dynamics that seriously jeopardize the transmission of monetary policy in all euro area countries, thus allowing the Governing Council to fulfill its mandate to preserve price stability more effectively ”. The ECB will then continue to fully reinvest the repaid capital on maturing bonds as part of quantitative easing “for an extended period of time”. For what concern Pepp pandemic buying planthe board intends to reinvest the repaid capital on the securities maturing “at least until the end of 2024” and “in a flexible manner in order to counter the risks for the transmission mechanism related to the pandemic”: that is, when the securities expire Germans can be bought, in case the spread is increasing, Btp Italians.

The turning point of July – On 21 July, the ECB raised rates by 50 basis points: it was the first hike in eleven years. An end to the era of negative rates. Last month Isabel Schnabel, German member of the executive committee, he said that “determination” is better than “caution” and it is necessary to prevent inflation from entering into people’s expectations of prices and wages. This “even at the risk of lower and higher growth unemployment“. The Italian member of the board Fabio Panettatalking with Milan Financehe had instead warned that it is necessary to “fully consider the economic conditions of the Eurozone. This implies being aware that the likelihood of a recession is increasing ”.

The risks – The risk is to repeat what is now considered by all to be the error of Jean Claude Trichetthe president of the ECB who in 2011 raised rates twice just when the eurozone crisis was worsening, condemning the economies that were growing less: the so-called Piigs already in trouble due to high debt. But the situation today is much more uncertain than that of the crisis of sovereign debts, when the spreads were a thermometer to the reliability of the countries. Even now i government bond yields are on the rise, even now some try to make bearish bets against the euro, but to this is added the impact of energy crisis. The worst possible scenario, namely the Russia that closes the taps of the gas, has in fact materialized. For now, the data on GDP have received no worrying signals – the growth of the eurozone in the second quarter of 2022, increased by 0.8% compared to the first three months of the year – but industrial production, which has already fallen in Italy for two months, now it begins to go down even in Germany.

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