Very high interest rates will persist for another year, at least until the end of 2024 or mid-2025, according to several analyzes carried out following the interest rate hike announced yesterday by the European Central Bank (ECB) and in light of its own new projections from the ECB, which predict that in two years’ time inflation will still be above the 2% limit, i.e. a price rhythm that continues to require restrictions through interest rates.
On Thursday the 14th, the President of the ECB, Christine Lagarde, explained her tenth interest rate hike in the context of this crisis caused by the Russian war against Ukraine (inflation remains too high and will average around 5.6% this year lie if the bank’s target is 2%).
But he left a new message, in the form of good news: if there are no more surprises in prices (for example in the energy sector), the peak of the upward cycle may have been reached.
He also left some bad or less good news: “key interest rates have now reached levels that will make a substantial contribution to the timely return of inflation to the target”, but this will only be the case “if these levels are maintained for a sufficient period of time ”. long period”. In other words, the burden of high interest rates will not be alleviated anytime soon.
“It clearly appears that the ECB remains very concerned about inflation, not only about registered inflation, but also about future inflation, as for example the latest projections from ECB experts show that inflation in this area will will reach 3.2% by 2024,” said Carsten Brzeski, chief macroeconomics economist at Dutch financial group ING.
“Looking ahead, a further weakening of the European economy and a further strengthening of the disinflationary trend will make it very difficult for the ECB to find arguments for another rate hike before the end of this year.”
According to Brzeski, “the announced increase not only strengthens the ECB’s credibility, but will also be the last of the current cycle.”
The end of rising interest rates does not mean the end of restrictive policies
And how long can Europeans expect these levels of tightening?
According to BPI research house, “the highlight of this ECB meeting was the sign that current levels (deposit rates of 4% and refinancing rates of 4.5%) are likely to mark the end of the cycle of rising interest rates, after an accumulated increase of 450 basis points [4,5 pontos percentuais] since July 2022).
For the BPI agency, this “possible end to interest rate rises will not mean the end of restrictive monetary policy.”
On the contrary: “the ECB reiterated that, in its fight against inflation, interest rates must remain at current levels for a sufficiently long time.” ‘Long enough’ was the term Lagarde used.
“In Lagarde’s words, inflation will remain too high for too long (3% at the end of 2023 and throughout 2024),” which provides arguments for maintaining very high pressure on the economy through interest rates.
On the other hand, the fragility of the latest activity indicators has not led to a deterioration in the ECB’s view on economic growth: forecasts reflect sluggish activity for the rest of the year, but without falling into recession and the dynamics to be restored in the spring. of 2024″.
In other words: the economy appears to be able to bear the weight of high interest rates for a long time to come.
According to BPI Research, Lagarde repeatedly used the adjective apathetic (slow) and avoided talking about recession.
So “after today’s meeting, the implicit expectations in the money markets are that the ECB will maintain the policy rate [depósitos] at 4% and the refinancing rate at 4.5% until the third quarter of 2024, when a first interest rate cut could take place (expectations in line with our own forecasts),” says the same consultancy.
At the press conference in Frankfurt, after the interest rate meeting, Lagarde revealed that this time, unlike what happened, there was no unanimity on the decision to raise rates, but said there was a “solid majority” in favor of interest rate increase. at the expense of the pause, the option championed by governors such as Portugal’s Mário Centeno.
For most German decision makers this will not be the case. Clemens Fuest, president and chief economist of the Ifo Institute in Munich, praised the ECB’s rate hike.
“The reasoning behind this rate increase is solid. Inflation remains high despite the economic slowdown, with the ECB raising its inflation forecast for 2024 and in this context an interest rate increase makes sense.”
“For Germany, this increase is painful given the contraction of the domestic economy, but we need to see the ECB implement a monetary policy not only for Germany, but for the eurozone as a whole,” Fuest argues.
With ECB interest rates having peaked at this stage, they should therefore remain at a very high level (nearly 5%) for “a long period of time” as new forecasts indicate it will take a long time for inflation to has calmed down. Lagarde signaled.
This “long period” of restrictive interest rates could last two years if the central scenario of the authority’s new forecasts comes to fruition.
This means average inflation will remain above 2% through 2025, with the eurozone economy approaching stagnation this year (0.7%) and growing just 1% in real terms next year, the ECB said on Thursday .
When asked how long the long period she is talking about is, Lagarde said in black and white: “We will not reach our headline inflation target in 2025.” “We have to reach our target of 2% [a meta oficial do BCE] only in the third quarter of 2025,” the central banker warned journalists.
Therefore, interest rates may begin to decline from their current peak in the fall/winter of next year. If all goes well, of course.
Source: DN
