“The likelihood of a recession is now much more on the horizon,” unemployment could rise and there is “concern” about these threats, European Central Bank (ECB) president Christine Lagarde said yesterday, the day that they a new sharp rise in key interest rates.
Yesterday, despite first uttering the word ‘recession’ during this crisis, the ECB tightened the cost of money even further, pushing, for example, the eurozone’s main interest rate to 2%.
It is these refinancing fees that are applied to banks when they need to get money from central banks on a regular basis. If these costs rise, banks will sooner or later pass this pressure on to customers.
And this is what has happened, especially since late spring, when it became clear that the ECB would start a cycle of rate hikes to stop inflation, which in Lagarde’s words (also yesterday) is “too high”.
Third dose of the ‘vaccine’ against inflation
That is why yesterday, even with a “recession” and more unemployment on the horizon, the ECB raised the aforementioned main interest rate to 2%. In June it was still at 0%, a level where it had been for more than six years. In July, the monetary authority made its first increase (to 0.5%), in September it added another 0.75% (the rate was 1.25%) and now it repeated the dose (plus 0.75% ).
A key interest rate of 2% in the eurozone represents a return to January 2009 levels. Europe tried to recover from the major financial crisis of 2007/08, but was already heading for the major sovereign debt crisis that was underway. to stop the common currency project.
These three rate hikes in 2022 make up the most muscular rate hike cycle in the history of the eurozone and the ECB (interest rates have been set in Frankfurt since 1999).
In addition to concerns expressed about the risk of a recession (Germany, the euro’s largest country, is already projecting a contraction in 2023), Lagarde added that the hitherto low unemployment rate should also start to rise, albeit ” light”. “We are especially concerned about people with lower incomes,” added the former head of the International Monetary Fund (IMF).
But inflation in the eurozone is so high that Lagarde has said in various ways and forms that interest rates will continue to rise.
And that in December the criteria will be unveiled for pouring into the markets the huge amounts the ECB has in government bonds and private debt.
“We’re Not Ready Yet”
Regarding rate hikes, Lagarde said “we’re not done yet, there’s more to cover”.
In September, eurozone inflation peaked at almost 10% (annual change in September), which is five times higher than the medium-term average inflation of 2% that the ECB is targeting and including in its policy programme.
“The Governing Council will base the future path of key interest rates on the evolution of inflation and the economic outlook, according to its per-meeting approach,” the institution said.
And for now, the only certainty is that “inflation remains too high and will continue to exceed the ECB’s target for an extended period of time”.
Therefore, the central bank can either raise interest rates very sharply or for a very long time. Asked at the press conference, Lagarde is not determined to go uphill.
“Slow down demand” so inflation doesn’t “take root”
He recalled that “inflation in the euro area reached 9.9% in September” and that “the rise in energy and food prices, supply bottlenecks and the post-pandemic recovery in demand in recent months have led to a generalization of price pressures and a rise in inflation.”
With these sharp rate hikes, the ECB is directly saying that it intends to curb demand so that inflation in the euro area does not “take root” and so that it does not last long.
As “economic activity in the eurozone is likely to have slowed significantly in the third quarter of the year” and “further weakening is expected through the remainder of this year and early next year,” Lagarde warned that what weighs on budgets now is inflation.
“By lowering people’s real incomes and raising operating costs, high inflation continues to hold back consumption and production,” he said.
Therefore, rooting high inflation would now be even more destructive, the ECB board seems to understand, although there seem to be people who disagree.
Mário Centeno, the governor of the Bank of Portugal, has defended interest rate hikes but has called for more moderate rates, creating a sense of more stability in businesses and households. He was accompanied by the Prime Minister, António Costa, and the President of the Republic, Marcelo Rebelo de Sousa.
German Bundesbank governor Joachim Nagel is a strong supporter of significant rate hikes, and has even recently called for a 1% rate hike.
Bank finances damage caused by inflation and less investment
Since June/July, the banks, including the Portuguese, have experienced significantly higher costs for new loans, both for the purchase of a home and for business activities.
In the case of Portugal, smaller companies (SMEs) are taxed more heavily, the Bank of Portugal said this week.
In the eurozone, Christine Lagarde noted that, despite rising costs, credit flows to companies remain “robust” and will fund “high production costs” and inventory accumulation. Demand for loans to finance investments “went back further”.
Luís Reis Ribeiro is a journalist for Dinheiro Vivo
Source: DN
