Too late, too slow? The European Central Bank begins Thursday the big maneuvers in the face of galloping inflation and will raise its rates for the first time in eleven years, but it is already under pressure to do more.
The battle plan was announced in June: to try to stem the rise in prices, the ECB will raise its key rates by 25 basis points, a first since 2011.
The guardians of the euro have been carefully preparing for months for the end of cheap money, which has helped the economy overcome the crises of recent years.
This tightening of monetary policy had already begun in July with the halt to new debt purchases on the markets.
Objective: to reduce the money supply in circulation and curb inflation which broke a new record in the euro zone last month, at 8.6% over one year.
The Frankfurt institution therefore ends up joining the ranks of other central banks, such as the American Fed, which have been much more active for months against soaring prices.
‘Hesitant’ reaction
For no less than eight years, the ECB has applied a negative deposit rate (-0.50%) to the excess liquidities entrusted to it by the banks, with the aim of encouraging them to grant more loans to support activity and raise the inflation rate to 2%, in accordance with its mandate.
This price increase target remained out of reach for years. It is now largely pulverized 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 guardians of the euro, who have long ensured that this surge in inflation was temporary, had to admit that they had underestimated it.
In retrospect, ‘the very gradual and cautious normalization process that the ECB began at the end of last year was simply too slow and too late’, judge Carsten Brzeski, economist at ING.
Also, the first rate hike of 25 basis points is akin to ‘a hesitant reaction given the extremely high inflation rates’, according to Ulrike Kastens, economist at DWS.
A jump of 50 basis points on Thursday ‘would be justified’, according to Jörg Krämer, economist at Commerzbank.
Some ‘hawks’ within the Board of Governors are also in favor of hitting hard, but the majority supports ‘a first proportionate step’ so as not to upset the markets.
Italy worries
Eurozone guardians, on the other hand, leave the door wide open to ‘further hikes’, should inflation continue its unbridled course.
On paper, the ECB faces an ‘unsolvable equation’, analyzes Frederick Ducrozet, chief economist at Pictet Wealth Management, citing ‘a eurozone economy on the brink of recession’, ‘the political crisis in Italy’ and ‘parity with the dollar reached by the euro for the first time in twenty years’.
The possible departure of Italian Prime Minister Mario Draghi has reignited fears that a spike in the country’s borrowing rates could prove explosive for the eurozone.
Italy’s debt had already found itself in the market’s sights in June when the ECB announced its next tightening.
A situation that the institution intends to combat by unveiling measures to prevent a ‘fragmentation’ of the euro zone.
Faced with the fall of the euro, the ECB reaffirms its mantra according to which it ‘is not targeting a particular exchange rate’, but remains ‘attentive to the impact of the exchange rate on inflation’. This seems to exclude a reaction in the immediate future.
If the ECB should keep Thursday under the pedal, it is also that it wants to avoid stifling an already shaky economic situation.
The European Commission has just lowered its growth forecasts in the euro zone for 2022 and 2023, to 2.6% and 1.4% respectively.
Failing to act energetically, the ECB will have to ‘send a signal to the population on its seriousness in the fight against inflation, otherwise it risks losing its credibility’, believes Edgar Walk, economist at Metzler Bank.
/ATS