The European Central Bank has unanimously decided to continue with the increase in interest rates for the ninth time in a year, bringing the rate on main refinancing to 4.25%, that on deposits to 3.75%. , and that on marginal loans at 4.50%. A possible pause in September is possible, given that inflation is falling, but “certainly” there will be no cuts, said the president of the Bank. Yesterday the Fed also raised interest rates again by 0.25%, to the highest level since 2001
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The ECB met today and decided to continue with the rise in interest rates: it is the ninth in a year, voted unanimously by the Governing Council. Thus comes a new increase of a quarter of a percentage point, which brings the rate on main refinancing to 4.25%, that on deposits to 3.75%, and that on marginal loans to 4.50%. Frankfurt could consider a possible pause in September, if inflation were to fall further. What is certain is that there will be no cuts, said ECB president Christine Lagarde at the end of the Governing Council meeting. “Inflation continues to fall but we expect it to remain too high for too long”, writes the Bank in the statement at the end of the meeting that raised rates. The goal is always the same: to reach the 2% inflation target. The short-term prospects for economic activity – said Lagarde – have deteriorated a lot due to weaker demand weighing on manufacturing, and investments are also showing signs of worsening. Lagarde added that services remain strong (but losing momentum), and – while the economy remains weak in the short term – the labor market remains robust, with unemployment at its lowest. However, some indicators show that the trend could slow down due to the decline in manufacturing. Yesterday the Fed also raised interest rates by 0.25%, to the highest level since 2001, also leaving the door open to further adjustments in the cost of money.
Nominal inflation and underlying inflation
Christine Lagarde started her hike cycle in July 2022, four months after the US, and the ECB remained hawkish until a few weeks ago. Something has changed since June: the debate between hawks and doves has reignited, and many board members ask to look at nominal inflation, which is declining, and not at core inflation, which is still persistent. “The factors that increase inflation – explained Lagarde – are changing. The pressure on domestic prices, including the rise in wages and margins on products, is increasing”, while ‘imported’ prices are decreasing.
The possible effects of Russia’s non-renewal of the wheat agreement
Lagarde underlined that “the data and the evaluation” will tell the ECB “how much more ground we have to cover” in the coming months: “We are dependent on the data and open to decisions in September and beyond, because these data could vary from a meeting to the other”. An unknown factor weighs on the future, that of Russia’s withdrawal from the agreement for the export of Ukrainian wheat through the corridors on the Black Sea. “Inflation could increase”, said Lagarde, explaining however that the pressure on food prices it’s decreasing.
ECB: “The decline in inflation will continue in 2023”
“Developments since the last meeting support expectations that inflation will fall further this year, but remain above target for an extended period”, and in particular “core inflation remains high”, writes the ECB in communicated. The increases, she explains, continue to be forcefully transmitted to the economy: credit conditions have tightened further, and demand is slowing down, “an important factor in bringing inflation back to target”. Decisions will continue to be based on the inflation outlook, underlying inflation dynamics and the strength of the monetary policy transmission.
In some countries, such as Spain for example, inflation has already returned below 2%, and the fear is that further increases will unnecessarily penalize the economy. Lagarde will have to make a synthesis between the requests of the doves, who would like a break in September, and the hawks who would like to continue. But the latter are less and less: even the rigid governor of the Dutch central bank, Klaas Knot, does not want to make any forecasts for September because anything is possible, including a break. The bad signals coming from the Eurozone economy play in favor of stopping the increases. The PMI indices in July are all still below estimates. And France and Germany – with the worst data – push the general slowdown in the Eurozone, which has already entered a technical recession at the beginning of the year.
The Fed hikes rates by 0.25%, the highest since 2001
Yesterday the Fed made its move by pushing rates to their highest level in 22 years. “We remain attentive to the risks of inflation”, he said at the end of the two-day meeting announcing his eleventh rate hike since March 2022, with which the cost of money rises in a range between 5.25% and 5. 50%, at the highest level since 2001. “The process of getting inflation back to 2% is still long”, says Jerome Powell indicating that prices could reach the target set in 2025. This, however, does not mean that the Fed will raise the cost of borrowing until the target is met. “We will stop sooner”, explains the Fed president who however ruled out a rate cut in 2023, also in light of the fact that there will be no recession. The Fed staff, in fact, has revised its estimates and now no longer foresees any contraction of the economy. Analysts are currently forecasting a 50% chance of a rate hike in September and are awaiting the usual appointment in Jackson Hole, Wyoming, at the end of August to understand Powell’s intentions.
The next moves
After the Fed and the ECB it will be up to the Bank of Japan to pronounce on its monetary policy on Friday, when it should keep rates unchanged. In fact, some analysts remain convinced that the central banks will keep the bar on the starboard side on increases also in September, until core inflation slows down. Noting persistent core inflation, which is declining globally only gradually, the International Monetary Fund indicated that banks in major economies should continue with hikes until prices are under control.