"It's not a break". "The journey continues". The president of the European Central Bank (ECB), Christine Lagarde, wanted to emphasize yesterday that the moderation in the rate of increases in the price of money announced yesterday is not a surrender or a change in trend: the ECB will continue to remain alert for watch inflation come down to the desired target of 2%.
After three straight hikes of 0.50 points, the European Central Bank yesterday raised rates by just a quarter of a point to 3.75%, the highest level in 15 years since the Lehman Brothers era . Therefore, the rate of increase in interest rates, a movement that began in July 2022, is slowing down. Although there have already been seven consecutive increases. "You have to look in perspective: even after yesterday, we are facing the biggest bullish cycle in the history of the euro. It cannot be said that Lagarde has fallen short", comments Víctor Alvargonzález, founder of the consulting firm Nextep Finance.
Why has President Lagarde lifted her foot from the brake pedal? If we wanted to continue with the metaphor, because the highest peak of the hill begins to be glimpsed, when the descent will finally begin. In Lagarde's words, there is one fact that made her be more cautious instead of launching into a steeper hike. And it is the slowdown in credit.
The figures show that many companies now think twice before going into debt, given the interest they have to pay. And this aspect is the first sign that the restrictive turn of the monetary policy is working and that it may not be necessary to go through the cracks, if we do not want to drown the European economy and throw it into a recession. Lagarde wants to press, but not suffocate.
In fact, eurozone GDP barely grew in the last quarter (0.1%) and lending figures showed the biggest fall in credit demand in more than a decade, which suggests that the previous rate hikes are beginning to take effect in the economy.
The ECB president's insistence on repeating that "there is more to go" (she said it more than five times) is because underlying inflation is struggling to come down. And why? There are no more bottlenecks, raw materials have dropped... The problem is, in his opinion, wages and business profit margins. These two elements make it difficult for inflation to decrease.
"Wage pressures have intensified further as workers, against a backdrop of a robust labor market, regain some of the purchasing power they have lost as a result of high inflation," Lagarde added.
The million dollar question: when will the up cycle end then? Alvargonzález believes that we are not far from that moment, for a number of factors. First, the strength of the euro, which by definition is deflationary. Second, because the decline in oil, the price of energy and the cost of transport will sooner or later end up being transferred from general inflation (now at 7%) to underlying inflation (at a historic 5.7% in March).
At the subsequent press conference, Lagarde recalled that "the strength of the transmission to the real economy remains uncertain". Translation: if there are signs that point to a possible contraction in the GDP of the eurozone, this day will have to say enough. And that day will not be tomorrow: we must not forget that the unemployment rate in the Eurozone is at historic lows (6.5% in March).
Lagarde stressed that no member of the Governing Council supports a pause and that, despite some members wanting a 0.50 point hike, all are in favor of raising rates now and at future meetings.
In fact, the French lawyer and former minister intentionally accented the s at the end of the word decisions when she answered a question during the question and answer session: “Our future decisions will ensure that official interest rates are at sufficient levels to achieve a timely return of inflation to our medium-term target of 2%, and will remain at these levels for as long as necessary”.
“In this case, Lagarde can raise rates as if the world were to end because the stock market (and markets in general) is holding up reasonably well, as it is attracting investors from the dollar area, and because the US banking contagion is not spreading to European banking. European regulations are different, as is the banking business model. Hence his face of joy", adds Víctor Alvargonzález.
"The ECB is taking advantage of the solidity of European banks to continue tightening monetary policy", Natixis IM analysts agree. "But more evidence is needed that the underlying pressure on prices is trending downward before the dynamics of wages, margins and prices become unmanageable."
