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This is the first in ten years. Until now reluctant to tighten its monetary policy as several central banks were already beginning to do, the ECB is beginning to raise interest rates in the euro zone. The normalization of European monetary policy could take place at the beginning of the third quarter, announced the president of the European Central Bank, Christine Lagarde, by ending her asset purchase program (APP) followed by “a few weeks” a rate hike later.
“My expectation is that they [les achats d’obligations] should be completed early in the third trimester”declared Christine Lagarde during a conference in Slovenia. “The first rate hike (…) will take place some time after the end of net asset purchases (…), which may take only a few weeks”she added.
fight against inflation
This announcement confirms market expectations, which foresaw a rise in interest rates in July to curb the rise in consumer prices. Most of the other big central banks have already raised their rates, but the ECB continues to inject liquidity into the financial system through the purchase of bonds in the markets. Thus, the Fed raised its reference rates by half a percentage point at the beginning of May, the first increase of this magnitude since 2000, in the hope of reducing its inflation, which reached 8.5% in one year. The Central Bank of England (BoE), for its part, raised its interest rate to 1% on Thursday, its highest level since 2009 for the same purpose.
In Europe, several factors have contributed to the current inflationary context, such as the strength of the economic recovery last year with the improvement of the health situation, the war in Ukraine and the acceleration of the rise in energy and fuel prices that accompanied is, the ruptures in the supply chain that were accentuated by the conflict… Although inflation continues to be more moderate than on the other side of the Atlantic, in the euro zone it reached 7.5% per year last month, far from the 2% target. set by the central bank. This justifies a rate hike in July as a growing number of members of the ECB Governing Council have requested in recent months.
“What started as a one-time shock has now turned into a bigger phenomenon”said Bostjan Vasle, Governor of the Bank of Slovenia.
“When circumstances change, the political response must follow”, he added.
His Bundesbank counterpart Joachim Nagel and ECB board member Frank Elderson also advocated a July rate hike on Wednesday. At the end of April, several sources, quoted by Reuters, were anticipating at least two rate hikes this year and some even thought a third could come before December 31.
According to Estonian Governor Madis Müller, the ECB deposit rate, currently at -0.5%, could turn positive again by the end of the year, which has not happened since 2014.
“Even if we raise rates by 25 basis points, we could get to a positive rate by the end of the year”he said in an interview with Reuters.
Reduce public debt
But this policy will not be without consequences and will have to be accompanied by an effort to reduce the public debt, warned François Villeroy de Galhau, who regrets that too many French people consider that the debt “it would have become unlimited and costless”.
According to the central banker, who anticipated a rate hike starting in the summer, “It will rise but very gradually (…), but the European Central Bank and the Banque de France will do whatever is necessary (…) so that inflation returns to around 2% in the next two years”.
“Therefore, it is even more important for budgetary authorities to ensure debt sustainability in the context of rising rates”added the one who is also a member of the ECB.
According to the Banque de France, every 1% increase in interest rates represents an additional cost of almost 40 billion euros per year after ten years, which is almost equivalent to the current defense budget.
Warning about the financial situation of France already last January, François Villeroy de Galhau advanced certain clues to try to contain the public debt. The “It is not about reducing public spending as a whole, but about tending to its stabilization” limiting its growth in volume to 0.5% per year, compared to the more than 1% observed during the previous decade, “at constant rates of mandatory deduction”, He explained. Although they represented 55.4% of GDP in 2019, the level of public spending reached 61.4% in 2020, up to 59.2% in 2021, according to INSEE.
Regarding debt relief, the governor leaves aside “this monetary miracle” : “Some make believe that the cancellation of the debt that the Banque de France and the Eurosystem have would be a solution. It is not like that. A debt cannot be canceled, it can be refinanced at maturity, but it is not like that.” never automatic And the lender will only refinance if he has confidence in the sustainability of this debt A private or public lender that is not repaid will no longer lend“,