Inflation in the eurozone remains too high. After the rise of one tenth in April, reaching 7% year-on-year, it was foreseeable that the European Central Bank (ECB) would continue with its restrictive cycle of the money supply, if one thinks that the objective by its statutes would have to be 2 %.
And so, today the institute chaired by Christine Lagarde has given another turn of the screw and has increased 25 basis points. The price of money in the euro area is already at 3.75%. We are facing the seventh rise in a row since July 2022 (when rates were negative!). The news this time is that the increase is pausing compared to the previous three increases, which were half a point instead of a quarter point.
Perhaps the ECB, with the price of money at these levels (a level not reached since the days after the bankruptcy of Lehman Brothers in 2008), wanted to avoid choking the economy too much, hence the slowdown. Indeed, eurozone GDP barely grew last quarter (0.1%) and loan figures showed the biggest drop in credit demand in over a decade, suggesting that past rate hikes They are starting to make a dent in the economy.
The ECB, in any case, already indicated at its last meeting that the increases would continue. Today he has kept the same message. "Headline inflation has come down in recent months, but underlying price pressures remain strong. At the same time, past rate hikes are feeding hard into euro area financial and monetary conditions, while the delays and intensity of the transmission to the real economy remain uncertain," the bank explained in the statement.
To add: "Future Governing Council decisions will ensure that official interest rates are placed at sufficiently restrictive levels to achieve a timely return of inflation to the medium-term objective of 2% and remain at such levels for as long as be necessary".
Some economists, such as Ottmar Issing, who was chief economist at the ECB in 1998, believe that Lagarde's misassessment of rising inflation, to which she was slow to react, "was one of the biggest forecasting errors of the history". Now the French has taken it seriously. He said that inflation "is a monster to hit over the head." The French since last summer is recovering ground, time, and perhaps credibility. But there are those who wonder if, after acting late, now it would not be exceeding.
In the previous ECB meeting there were already different positions among the members of the Council, a sign that there is no consensus on the rhythms to follow. The closer we get to an interest rate considered high enough, the more it is bound to increase the mismatch.
The increase in the price of money is bad news for those who must pay a mortgage, since this rise will end up having an impact on the Euribor reference index. Good news, on the other hand, for those who want to travel outside the euro zone this summer, since the European currency will tend to appreciate compared to other currencies in international markets.
Regarding the Asset Purchase Program (APP) and Pandemic Emergency Purchase Program (PEPP), "the APP portfolio is declining at a measured and foreseeable rate, as the Eurosystem does not reinvest all principal payments on the securities that expire". "The decrease will amount to 15,000 million euros per month on average until the end of June 2023. The Governing Council expects to interrupt reinvestments within the framework of the APP as of July 2023," it is stated.
In other words, there will be less and less liquidity in the system.
