Households, businesses and the most indebted states will face very complicated years until 2025 or even 2026, according to several indications left yesterday by the European Central Bank (ECB) and its president, Christine Lagarde, that point to inflation above the target of 2% in 2025, but with the economy returning to growth close to 2% in 2024 and 2025.
Several analysts who specialize in reading the ECB’s oracle argue that if the inflation forecast for the Eurozone remains above the 2% target, but if the same projections also indicate that the economy can sustain growth close to 2%, they appear to be are arguments for many and strong interest rate rises in the next three years or more.
And it doesn’t have to be just because of the cost. The price of loans and government credit may also continue to rise due to the rise in borrowing costs charged to banks, governments and companies through the various liquidity provision and asset purchase programs (such as government bonds).
“We must go further” in raising interest rates, the road “is long”
Yesterday, as expected, the ECB raised benchmark interest rates by half a percentage point, bringing the central refinancing rate to 2.5%, the highest since late 2008/early 2009.
But Lagarde surprised and somehow ushered in a new era of much more aggressive monetary policy in the Eurozone, promising a long and arduous road until inflation returns from the current 10% to the desired 2%.
The tone is harsh and serves as a warning to families who have installments to pay the bank, to states that owe mountains of money to the markets and banks, to companies that have prepared investments and need credit to activate them and to those who need credit to have liquidity and to survive the current crisis, which is getting worse.
After months of taboo, the ECB is already admitting to, for example, a recession in the eurozone and rising unemployment.
“We still have a way to go”, “we have to move on”, “we are in a long race,” Lagarde said at the press conference she gave yesterday in Frankfurt, referring to the challenge of raising interest rates to fix the crisis inflationist.
For example, he said in black and white that the increase in financing costs for economic agents in the eurozone will have to continue “significantly” and “at a constant pace”.
That is, Eurozone citizens can expect several increases, say 0.5 point, over a long period of time and on a regular basis until inflation is tamed.
The chairman of the monetary authority couldn’t escape it and even said that at the next meeting of the ECB, on February 2, a further increase in the reference rate by 0.5 percentage point to 3% is practically guaranteed. And that in the next meeting “possibly” there will be another 0.5 increase and in the next “possibly” another tie. And so on.
In addition to rates, the ECB will also make money more expensive by adjusting the terms of asset programs. Ultimately, in the special lines of the liquidity provision, but then a posteriori.
After quantitative easing (monetary expansion), this is where it starts quantitative tightening (monetary tightening). From March, the ECB will start definitively shedding government bonds and other securities it owns at a rate of EUR 15 billion per month for four months, which will drive interest rates even higher over that period. Then you see if you squeeze more or not.
“Today’s big policy change was in communications, with more aggressive messages about future interest rate evolution,” said BPI’s research firm.
The ECB’s macroeconomic forecasts, based on the assumption that monetary policy evolves as markets are discounted (deposit rate slightly below 3% in 2023), suggest that it will take three years or more to reach the target of 2% inflation. to achieve.”
“In other words, as suggested by Lagarde, the ECB should conduct more restrictive monetary policy than the discount price,” say BPI analysts.
There are three key terms guiding the ECB’s change: raising interest rates “significantly”, at a “sustained” pace, and “holding” interest rates at a restrictive level for a long period of time,” the economists add. please.
In other words, and according to Lagarde, the ECB can be expected to raise interest rates at a rate of 0.5 percentage point over a period of time and, when the desired level is reached, to hold it at this restrictive level for some time. predicts the BPI research team.
Salomon Fiedler, an economist at the German investment bank Berenberg, is of the same opinion.
“The ECB said it intends to keep interest rates at restrictive levels to reduce inflation in coming years by reducing demand and also to protect against the risk of continued changes in inflation expectations,” the analyst said.
For Fiedler, “this suggests that the ECB is now more concerned about insufficiently tightening borrowing costs and should accept some short-term economic pain to bring inflation to the 2% target.” That is, this “tilts up the future path of ECB interest rates”.
Taking into account that the ECB is now advancing with an inflation forecast of 3.4% in 2024 and 2.3% in 2025, on top of underlying inflation (excluding energy and food) of 2.4% in 2025, the German economist believes that “the ECB will decide that it will be necessary to tighten monetary policy even further than expected”, now and in this time horizon.
Here is the first recession
For now, this Thursday, December 15, 2022, the President of the ECB has finally admitted that the Eurozone is already or will be in recession between the end of this year and the beginning of next year.
In any case, Christine Lagarde says that when it happens, this contraction of activity should be “shallow and short-lived.”
After growing by 3.4% this year, the ECB forecasts eurozone wealth to grow by a measly 0.5% in 2023. And it could be worse. In the adverse scenario, the economy could even lose 0.6% in real terms next year.
Next year inflation should reach 6.3%, but in a more serious scenario it could rise to 7.4%, the ECB calculates.
In any case, “as the economy weakens, job creation is likely to slow and unemployment may rise in the coming quarters,” warned the governor of the central bank of the 19 euro countries.
Luís Reis Ribeiro is a journalist for Dinheiro Vivo
Source: DN
