The European Central Bank raised interest rates this Thursday by a quarter of a point, to 4.5%, its highest level since 2001. The mediocre growth data in the euro zone has not appeased the Frankfurt-based institution. , which with its decision to increase the price of money for the tenth consecutive month, the longest streak since the creation of the single currency, sends a strong message of fighting against inflation, but at the same time gives rise to the debate about whether it will not be braking and imitating past mistakes that later took a lot of time and pain to correct.
Eurobank economists have significantly lowered their economic growth projections. They now expect the eurozone to rebound by 0.7% in 2023 (up from 0.9% previously), 1.0% in 2024 (up from 1.5%) and 1.5% in 2025. one tenth less. In total, it subtracts eight tenths from its previous forecasts. It also worsens the price scenario: it now estimates an average inflation for this year of 5.6%, and 3.2% for next year (two tenths more in both cases), although it improves it for 2025 by one tenth, when It should be at 2.1%, practically identical to its objective. As soon as the ECB’s decision was known, the euro depreciated slightly against the dollar, and was exchanged for 1.07 greenbacks. “Inflation continues to decline, but is still expected to remain too high for too long.” […] The upward revision for 2023 and 2024 mainly reflects a higher path for energy prices,” the agency justifies in its statement.
For the first time in more than a year of tightening monetary policy, the ECB had been elusive when it came to revealing its next step, implying that everything would depend on the evolution of economic data. Analysts spoke of Lagarde’s dilemma, trapped between the voices that considered premature interruption and those that demanded it as essential. Not even investors were clear what would happen. They appeared very divided between those who were betting on the first pause in 14 months and those who opted for a last increase before the fall.
Two stories lay on the table to choose from to justify one decision or another. The first says that rate increases are already causing a certain contraction in credit and cooling the economy, which has already paved the way towards more normal inflation rates without the need to add fuel to the fire by raising rates. The other is pure mathematics: a still enormous 5.3% inflation stuck on the back of the euro zone that more than doubles the bank’s price stability objective, set at 2%.
Against the main argument for interrupting rate increases, that of a halt in activity, it was argued that the ECB’s main objective is to contain inflation at all costs, and not so much to achieve a certain GDP growth, no matter how much the Netherlands has entered recession, Italy may soon follow, Germany has shown ample signs of weakness, and the euro zone has only grown one tenth in the second quarter. And against the argument put forward by those in favor of continuing to raise the price of money, that of persistent inflation that does not end at the desired rate, that decisions are not made following scientific criteria or automatically, but based on an interpretation collective data, reasoning and deliberations, and like everything that involves people, in the feelings and perceptions of the Governing Council.
The balance was finally tipped by the numerical evidence of prices still out of control. In a last attack before the foreseeable pause to come, the most orthodox sector has imposed its theses. In August, although core inflation – closely followed by central banks – fell two tenths, it still remains at a high 5.3%, the same rate as the general rate, so the statistics did not contribute to calming the mood of the falcons, as supporters of aggressive rate hikes are called. Added to this is the entry into play of a new factor of concern in the escalation of oil prices, at a ten-month high due to production cuts by Saudi Arabia and Russia, which has been passing these increases on to the pumps for several weeks now. and threatens to reverse progress that was already considered achieved in the long battle against the price crisis.
For critics, Lagarde and her team’s decision to raise rates to 21st-century highs can be said to resemble a famous episode in medical history. In 1927, the Austrian neuropsychiatrist Julius Wagner-Jauregg won the Nobel Prize in Medicine for discovering the benefits of inoculating patients infected with syphilis with malaria. Raising interest rates, or in other words, making the price of money more expensive, has long been considered the most effective remedy against high inflation. It is a slow medicine – it is often said that its effects begin to be noticed a year later -, not without danger, just like prescribing one disease to cure another. A dose that is too high is synonymous with economic recession because the blood flow of financing is cut off, and for a good part of the households, those indebted with variable mortgages, it has consequences as or more pernicious for their purchasing power as inflation itself, because its quotas skyrocket.
The coin has another side. Those who have savings are taking advantage of these rate increases to invest them in public debt, because this usually increases its profitability when the ECB raises rates, and thus obtains much safer remunerations – in Spain 12-month bills are close to 4% – than those of other financial products, given that they would only stop collecting in a scenario as unlikely as the State not returning its debt.
Christine Lagarde appears at 2:45 p.m. to report on the decision.
[Noticia de última hora. Habrá actualización en breve]
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