As expected, the European Central Bank raised interest rates on Thursday by half a percentage point against a backdrop of persistent inflation and a resilient economy. ECB President Christine Lagarde had killed the suspense in December, promising a second consecutive 0.50 point rise for February. But the guardians of the euro surprised when they warned on Thursday that they would raise rates again by the same magnitude at their next meeting in March.
“Given underlying inflationary pressures, the Governing Council intends to raise interest rates again by 50 basis points at the next monetary policy meeting in March,” the ECB announced. The three rates of the institution rose this Thursday in a range between 2.5% and 3.25%, the highest since November 2008.
The BCE faces a massive envolée des prix déclenchée par la guerre russe en Ukraine, ce qui l’a menée à lancer un cycle de hausses de taux en juillet, inédit par son ampleur et mettant fin à près d’une décennie d’argent pas darling. Unlike the US Fed, the Frankfurt institution believes that it is not yet time to slow down and rein in its monetary tightening. On the other side of the Atlantic, the US Federal Reserve raised its main rate on Wednesday for the eighth straight time, but slowed the pace compared with previous increases.
trompe l’oeil
While in the US inflation peaked in June 2022, the phenomenon is much slower in the Eurozone: price growth peaked there only in October at 10.6%. In January, inflation in the euro zone fell for the third consecutive month, to 8.5%, more than expected by economists thanks to the fall in energy prices. But it remains well above the target set by the central bank, ie 2% in the medium term.
This is also a simulated improvement because “core” inflation, excluding energy and food, at the same time held steady at 5.2% and “should remain stubbornly high in 2023,” warns Fritzi Köhler-Geib, chief economist at the public bank. KfW. In question, “improving economic prospects, a tight labor market, substantial wage demands and a high proportion of European companies that expect sales prices to continue to rise,” according to the expert.
The ECB is far less scrupulous about further tightening the monetary screw as the euro zone should escape a recession this winter, thanks to slight GDP growth (+0.1%) in the fourth quarter of 2022, according to Eurostat. The current first quarter saw activity pick up in January, according to the PMI, thanks to improving supply chains and the reopening of the Chinese economy.
And then?
How far will the ECB rate hikes go? This is what economists will see in Christine Lagarde’s comments during the 2:45 pm press conference. The ECB’s statement leaves the door open to all options, stating that future decisions “will continue to be data-driven.” But the institution also warns that “it will continue to increase interest rates substantially at a constant rate and keep them at sufficiently restrictive levels so that inflation returns as soon as possible” towards the target.
The continuation of monetary course is likely to revive the debate among central bankers torn between their fight goal and the impact of their monetary policy on growth. The hawkish hawks now dominating Frankfurt are expected to advocate keeping interest rates high, at least until 2024, while conservatives favor loose monetary policy. An hour before the ECB decision, the Bank of England raised its reference rate by 0.50 percentage point to 4%, the highest level since 2008, to counter inflation that is still above 10% in the UK.
Source: BFM TV
