The ECB believes that inflation is too high and may remain above expectations for too long. President Lagarde insisted on her fundamental objective: to achieve annual inflation of 2% in the medium term. She is referring to inflation in the euro zone, which has gone from 7% in April to 6.1% in May and 5.5% in June. In July interest rates increased again by 0.25%. As of August 2, refinancing to banks will cost 4.25%; marginal financing operations 3.75% and excess liquidity that banks deposit with the ECB will have a remuneration of 3.75%. The executive committee wants to reduce the volume of the bank and will stop reinvesting the bonds that come to maturity, as happened with the funds to deal with the pandemic, although for these the term may go until the end of 2024.
It will stop buying new bond issues from non-financial companies and will reduce the volume of ECB assets. Less liquidity and more expensive resources can make loans more expensive for companies that need resources for new investments. The remedy to deal with inflation is sometimes worse than the disease, as it can lead to a recession. Germany can get it. The ECB will stop paying banks the minimum reserves that they had to maintain on the deposits of their clients. According to President Lagarde, this change will improve the efficiency of monetary policy. The ECB will save what it paid to the banks. Another more difficult thing will be the remuneration that clients with deposits in Spanish banks obtained (the first to remunerate them were foreign and smaller banks).
The day before the ECB executive committee, the Federal Reserve increased its interest rates by 25 basis points (nine consecutive times), leaving the doubt of a possible waiting period for the month of September. Although they seem to act in the same way, applying successive increases in interest rates as a remedy to reduce inflation, in reality their objectives are different. For the United States, the Fed must pursue: the growth of the American economy and at the same time interest rates high enough to reduce inflation. By mandate, the ECB pursues a single objective: to achieve price stability. It is not easy to have 20 inflation rates for the Eurozone, different fiscal policies and still pursue a medium-term inflation rate of 2%.
Interest rates could change cycle if energy and food costs do not increase and in the wholesale market the increase in the supply of funds from banks leads to lower Euribor rates.
