The government support that governments are giving to households and businesses to overcome the consequences of the current crisis, especially in the energy sector, is already hampering the work of the European Central Bank (ECB), he says, now that they have a point reached where it began to fuel inflationary pressures, which will force the Frankfurt institution to raise rates even further this year, beyond what it now considers an upward and expected path.
Yesterday, the ECB raised interest rates again (by half a percentage point, bringing the central refinancing rate to 3%), saying it “intends” to repeat this dose next month and that it will go away from worsening the cost of money will continue to be “significant” and “constant” for a long time, until it brings Eurozone inflation back to the desired 2%. Inflation is decreasing somewhat, but remains above 8%.
But at the press conference she gave in Frankfurt, ECB President Christine Lagarde expressed some impatience that governments continue to support the economy at a time when energy prices are falling somewhat.
According to the monetary authority, it is time to end this support as soon as possible, otherwise the increase in the cost of money will have to be greater and even more violent.
According to the central banker, “government support measures to protect the economy from the impact of high energy product prices should be temporary, targeted and adjusted to maintain incentives for lower energy consumption”.
But taking into account that we are already witnessing a “decrease in the intensity of the energy crisis, it is important to start now with a rapid withdrawal of these measures in line with the fall in the prices of energy products and in a coordinated manner. way,” defended Lagarde.
“Any measure that does not comply with these principles could increase inflationary pressures in the medium term, requiring a stronger monetary policy response,” the former director-general of the International Monetary Fund (IMF) warned.
“Furthermore, in line with the economic governance framework of the European Union, fiscal policy should aim at achieving a more productive economy and the gradual reduction of high public debt” and therefore start with “policies aimed at increasing supply capacity of the eurozone, especially in the energy sector, could help reduce price pressures in the medium term”.
To that end, the ECB is urging governments to “quickly implement their structural reform and investment plans under the EU’s Next Generation Programme”, the large multi-year envelope of European funds.
This warning to Lagarde’s navigation is for the euro countries, but Portugal has even recently been the target of a study by the ECB over the “problem” of poorly designed time-prolonging measures.
In the study reported by Dinheiro Vivo (DV), ECB economists criticize António Costa’s government for ill-designed anti-crisis support and could exacerbate inflation.
“In the case of Portugal, the European Commission has issued a generally positive opinion despite this [nos progressos na redução do défice e da dívida]also saw risks of partial compliance, should energy-related support measures not be discontinued as planned,” point out the authors of the Frankfurt authority.
For the ECB, the less targeted, less adjusted and less temporary the support measures are, the more difficult it will be to withdraw them, the more rigid spending becomes, the less quality the budget and the greater the risk that these policies sparks more inflation in the near future.
The long road of rate hikes
As mentioned, the key interest rates of the European Central Bank (ECB) were raised by 0.5 percentage point yesterday, as expected. The central interest rate (refinancing rate) thus rose to 3%, the highest level in the last 15 years since the great financial crisis that broke out at the end of 2008.
But Lagarde went further. He said that in March he “intends” to repeat the dose and that the central refinancing rate charged by mainstream funds to commercial banks (as well as the other two benchmarks) should rise again and reach 3.5%.
The president of the ECB also reiterated that interest rates will have to rise steadily after March (therefore it is assumed that increases will always be 0.5%, as they have been since December) and rise steadily. — which can take a long time, there are even people who foresee two or three years of interest rate hikes.
In summary, the ECB says it will “continue its current path of significant rate hikes at a steady pace and keep them at sufficiently restrictive levels to ensure inflation returns to its medium-term target of 2% in a timely manner”.
The ECB will definitively start paying off the debts of the countries
In addition, also from March next year, the ECB and the central banks of the Eurozone will begin the final divestment of billions of euros that it still holds in securities (such as treasury bills) . It will stop reinvesting part of the portfolio of assets it has bought since the start of the euro crisis.
A large portion of these acquisitions is sovereign debt and this has greatly helped countries in recent years, especially highly indebted countries like Portugal, to brutally reduce the interest burden on the sovereign debt, a valuable aid to reducing the deficit and not being dependent of so much new debt to finance rising deficits.
Since February last year (Europe was on the brink of Russia’s war against Ukraine, which began on the 24th of that month), Portuguese 10-year (OT) government bond yields have soared from 1% to the current 3% in the secondary market. In other words, the cost of long-term debt has actually tripled. And it won’t stop here.
Until inflation took a turn for the worse, the ECB kept the programs running, the depressing effect on interest rates, reinvested securities and kept them on its balance sheet. From March, reinvestments will be “partial” and the calming effect on interest rates will gradually disappear.
To give you an idea of the size, the ECB and the central banking system (mainly Bank of Portugal) have approximately €53.7 billion of Portuguese government debt (value at the end of December).
This cake is starting to cut and, in fact, is gradually coming back to the market. In this set we are not only talking about government bonds, but also about debt issued by local (municipalities) and regional governments, as well as other public institutions.
Luís Reis Ribeiro is a journalist for Dinheiro Vivo
Source: DN
