Locked in a room without windows in the middle of the splendid hills of Sintra, in Portugal, the main bankers of the planet wanted to send, Wednesday, June 29, a message of absolute determination to fight against inflation. Whatever the economic cost.
Jerome Powell, Christine Lagarde and Andrew Bailey, heads of the central banks of the United States, the euro zone and the United Kingdom respectively, were gathered for the traditional annual conference organized by the European Central Bank – the first in physical form since the pandemic. With inflation exceeding 8% in each of the three regions, a long way from their 2% target, the three of them were expected at the turning point: will they continue to raise their interest rates while the economies are showing worrying signs of slowing down?
“Our mission, our work, our mandate is to ensure price stability, and we will bring [l’inflation] at 2%”answers M.me Lagarde. “To reduce inflation, you have to slow down demand, adds Mr. Powell. Is there a risk of going too far? Yes, but I don’t believe that’s the case. And above all, that would be making a much worse mistake than failing to control inflation. » While denying it, he lets it be understood that he prefers a recession to unbridled inflation.
“Where will the growth come from? »
The great fundraisers therefore promise to continue the path of « normalisation » of their monetary policy. The ECB, whose deposit rate is currently -0.5%, will increase it by 0.25 point in July – a first in eleven years – and probably by 0.50 point in September. By the end of the year, four increases should have taken place, for an interest rate close to 1%. In the United States, the Fed has already made three increases, for a total of 1.5 points. Its rate, currently in a range between 1.50% and 1.75%, should double again by the end of the year. The Bank of England is following a similar trajectory.
In private, the leaders of the ECB do not hide a certain unease
But in parallel with this monetary tightening, the problem is that the oil shock that the world is going through is putting a very serious brake on growth. “We are in the middle of a slowdown and the recession seems inevitable”, says Erik Nielsen, economist at Unicredit, an Italian bank. For him, the world economy, and particularly the euro zone, is facing a storm on all fronts. “We have the biggest drop in purchasing power in recent memory, world trade is slowing down, States are reducing their budgetary aid… Where will growth come from? » Mr. Nielsen is not betting on a worst-case scenario, believing that the recession should be limited, but he is concerned that central banks are raising their interest rates too quickly.
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