Unlike the Federal Reserve, which this month began draining its balance sheet to withdraw 95 billion euros from the market, the European Central Bank (ECB) has postponed for now the process of repaying the debt that has served as a catalyst for the eurozone economy from 2015 onwards. Christine Lagarde and her team trust everything, at least for now, to the rise in interest rates, which a week ago stood at 1.25% and which, if the announcement is fulfilled, will rise to around 2 .5% in the coming months. If not in December, it will probably be in February...
But the liquidity is not touched yet. “The ECB is neither there nor is it expected in terms of draining liquidity, which should have started at least a year ago,” says a financial analyst who requests anonymity. With a balance of almost 9 trillion euros, equivalent to 80% of the eurozone's GDP, the monetary expansion of the central bank has contributed – and continues to do so – to the banks and the entire economy of the eurozone swimming in abundance, from the point of view of available financial resources.
"It is clear that, although there is a lot of liquidity today, the rate hike has an impact on the economy, because financing becomes more expensive," says Enric Fernández, chief economist at CaixaBank Research, who believes that, yes, interest rates reals, those set by the market, will rise much more when liquidity decreases.
Some economists and not a few analysts question the ECB's recipe. Although there is a certain consensus that current inflation is fundamentally supply-related –due to the energy crash and bottlenecks– and not so much demand-related –in the eurozone there are no major wage tensions or an overheated economy like in the United States–, More orthodox point out that for the ECB to show an undoubted commitment against inflation, it should go beyond a mere rate hike.
But can and, above all, should it? Ignacio de la Torre, chief economist at Arcano, is convinced that the ECB will address this issue at its governing council on October 27, but little else. That day, in addition to raising rates another 50 or 75 points – to get closer to the level considered neutral of 2% – balance sheet management will be discussed and, predictably, it will be decided to wait and see... “The problem is that with a quantitative tightening [drainage of liquidity to reduce the monetary mass or money in circulation] the economy would not endure and risk premiums would skyrocket, especially if it is very aggressive”, says De la Torre.
For now, and with the eurozone headed for one or more quarters of negative growth, debt markets are holding up. Both Spain, and especially Italy –pending on its disturbing political future that will be settled next Sunday–, are financed normally and, just in case, the ECB is ready to act with its anti-fragmentation mechanism (the Transmission Protection Instrument or TPI).
Credit to families and companies is already slowing down, but it is flowing. “Liquidity will not be lacking because now there is a historical record of 8 trillion euros in deposits from companies and families in the eurozone and the only drain on the ECB's horizon is that of the TLTROs [long-term financing for banks], that expire in June 2023”, explains Roberto Scholtes, head of strategy at Singular Bank.
Continuing with the speech of Christine Lagarde, the president of the central bank, the data and only the data are what will mark the next actions of the ECB. Economist José Carlos Díez maintains that "it seems that inflation is already slowing down, but to go from 9% to 2%, surely something more than raising interest rates must be done and it will also be convenient to withdraw part of the money in circulation". Jerome Powell, chairman of the Federal Reserve, said lowering inflation would cause "some pain." In the eurozone it will be no different.
