As Russian gas deliveries via Nord Stream resume and Italian Prime Minister Mario Draghi resigns, the central bank is due to announce the extent of its monetary measure on Thursday.
The European Central Bank (ECB) will raise interest rates on Thursday for the first time in more than a decade in the face of runaway inflation. The measure marks a major turning point after a long period of easily accessible money in the euro zone.
But the central bank must at the same time be careful not to aggravate the economic crisis which is raging in an already weakened euro zone, energy problems and the open political crisis in Italy. Prime Minister Mario Draghi tendered his resignation to the Italian president on Thursday. With his pedigree as a former president of the ECB, he was perceived as a factor of stability by the markets.
The Frankfurt institution has already announced its intention to raise its rates, saying it is determined to bring inflation down to 2% over the medium term as required by its mandate. The only question is how big this hike will be: only a quarter of a percentage point as indicated in June or, as a growing number of experts believe, 50 basis points straight, economists ask. .
This last option would mean the end of the era of negative rates that began in 2014. A rate of -0.5% is now applied to part of the bank deposits dormant at the ECB, a measure encouraging the distribution of credit and therefore contribute to pushing up inflation.
Inflation at the top
However, inflation in the euro zone continues to climb under the combined effect of the post-Covid recovery, tensions in supply chains and the energy crisis linked to the Russian offensive in Ukraine. The inflation rate reached 8.6% in June over one year and is expected to rise further in the coming months.
Market players are betting on “resolute” action by the ECB, as evidenced by the recent rise in the euro against the dollar, after having evolved at parity. Why “flounder with a 25 basis point increase and wait for September to get it out of negative territory?” asks Antoine Bouvet, rate specialist at ING.
It is “difficult to imagine spending the summer with negative rates when inflation in the euro zone will continue to rise,” adds Franck Dixmier, director of bond management at Allianz Global Investors. The guardians of the euro will however have to manage this credit crunch with caution, at a time when fears of a new debt crisis are resurfacing with Italian political uncertainties. Mr. Draghi’s departure could lead to a dissolution of parliament and early elections this fall.
Rate spreads
His resignation immediately caused the Italian borrowing rate to take off again on the market, a few hours before a press conference where the ECB will detail the outlines of an “anti-fragmentation” shield for the euro zone. The latter was designed to smooth out the gaps between borrowing rates, or “spreads”, between risk-free borrowing countries, such as Germany, and other more fragile ones.
The ECB argues that these “spreads” hinder the proper transmission of its monetary policy. But strict conditions of use must be defined, the guardians of the euro not having the right to help governments budget. But “a self-inflicted political crisis in Italy is the textbook case where the ECB should not intervene,” warns Frederik Ducrozet, chief economist at Pictet Wealth Management.
The pioneering United States
By raising the cost of credit, for the first time since 2011, the ECB will follow in the footsteps of other central banks around the world. The US Federal Reserve has raised interest rates since March and its range for the federal funds rate, now between 1.5 and 1.75%, could be raised by 75 basis points at the end of July.
In the euro zone, the gas crisis complicates the task of the ECB. The Nord Stream gas pipeline linking Russia to Germany certainly restarted Thursday after ten days of maintenance, but at a reduced flow compared to that preceding the work and which itself represented 40% of capacity since mid-June. A complete stoppage of gas deliveries by Moscow would plunge the euro zone into recession and a too rapid rise in rates would worsen the situation.