The ECB strikes a blow to win its bet on inflation
The European Central Bank is raising key interest rates by 75 basis points to encourage savings and reduce consumption, a first in two decades.
In July, the ECB had a firm hand by announcing a surprise increase of 50 basis points, when 25 points were expected.
KEYSTONE/EPA/RONALD WITTEK
Caught up by inflation records, the European Central Bank (ECB) on Thursday accelerated the tightening of its monetary policy by deciding to raise its interest rates on an unprecedented scale.
The Board of Governors of the Monetary Institute decided to raise key rates by 75 basis points, the first in its two decades of existence – apart from a technical adjustment in 1999. Serving as a reference in a context of abundant liquidity, the rate on bank deposits at the ECB, reduced from -0.5% to 0% in July, thus goes to 0.75%.
The other two key rates, the one applied to banks on refinancing operations over several weeks and the one targeting the day-to-day marginal lending facility, go to 1.25% and 1.50% respectively. Rate hikes should encourage savings and reduce consumption, to reduce pressure on prices.
Strong inflation for a long time
In July, the ECB had a firm hand by announcing a surprise increase of 50 basis points, when 25 points were expected. This first rise in more than a decade came after a long period of cheap money helping to stimulate the economy.
The promise was then to do the same in September unless inflationary pressures ebb. However, prices rose in August to a record level of 9.1% over one year in the euro zone, well above the rate of 2% targeted by the ECB and pushing it on Thursday to send a strong signal. The new tensions in energy prices since the halt in the delivery of Russian gas to Europe even presage double-digit inflation in the fall.
The hoped-for decline in prices will therefore be delayed, as evidenced by the new inflation forecasts unveiled on Thursday, significantly raised until 2024. The aggregate, according to the ECB, should rise to 8.1% in 2022, before slow down to 5.5% in 2023 and 2.3% in 2024.
GDP growth is still expected at 3.1% this year, before plunging to 0.9% in 2023, much less than expected in the last set of projections published in June.
hard line
More inflation and less growth: it is in this darkened context that the hard line defended in particular by the German Isabel Schnabel, an influential member of the executive board of the ECB, weighed on the decisions of the day.
What matters is that the public maintains “confidence in our ability to preserve purchasing power”, insisted Isabel Schnabel.
AFP/Daniel ROLAND
It is necessary to show “determination” in the face of unbridled prices and this “even at the risk of weaker growth and higher unemployment”, urged Isabel Schnabel at the end of August. What matters is that the public maintains “confidence in our ability to preserve purchasing power”, she insisted. Until then, the dilemma between rising prices and fears of recession has held back action by the ECB, while other major central banks have started their rate-tightening cycle.
Within the Governing Council of the ECB, a fraction of decision-makers have defended a “gradual” action in terms of rate hikes, led by chief economist Philip Lane. But this clan turned out to be in the minority even though the batch of alarming news was piling up in the euro zone.
Economist Philip Lane argued for gradual action in terms of rate hikes.
AFP/ERIC PIERMONT
The weakness of the euro, which sank below the $0.99 threshold on Monday, could have been another argument for a monetary hammer blow. A weak euro increases the cost of imported products, which fuels inflation.
Fed ahead
US Federal Reserve rates are already between 2.25 and 2.50% and a 75 basis point hike is looming on September 21st. Concerning the ECB, this September tightening calls for others during the two meetings to follow before the end of the year, according to observers. However, an aggressive sequence by the ECB on its rates will increase the borrowing conditions of countries in the euro zone deemed vulnerable, such as Italy.
The institute may have to draw sooner or later its new tool, presented this summer, intended to nip speculative attacks on debt in the bud, according to Holger Schmieding, economist at Berenberg.
ATS
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