The European Central Bank (ECB) rules out a commitment to lower reference interest rates again in December. The minutes of the last meeting on monetary policy of the Governing Council of the institution show that some governors would have even preferred to postpone the October cut. Then, the ECB decided to reduce the official ‘price’ of money by 0.25 points, to 3.25%. This was the third drop in this phase of easing financing conditions due to the moderation of inflation and the slowdown in economic growth.
“Some members [del Consejo de Gobierno] “They initially expressed their opinion that they would have preferred to accumulate more information and wait until December, when a comprehensive evaluation of the medium-term inflation prospects would be available,” reflect the minutes that the ECB published this Thursday. “However, these members understood that precautionary risk management justified lowering rates now,” they continue.
The Governing Council of the institution is made up of the governors of the national central banks of each euro country and the executive committee chaired by Christine Lagarde and of which Luis de Guindos is vice president. “Looking ahead, members stressed that they remain determined to ensure that inflation returns to the medium-term target of 2%. [los últimos datos ya están en ese nivel, o por debajo]and that they will maintain sufficiently restrictive interest rates for as long as necessary to achieve that objective,” the minutes state.
“They will also continue to apply a data-driven, meeting-by-meeting approach to determine the appropriate level and duration of restriction. “There should be no prior commitment to a given rate path in order to have the freedom to respond as necessary,” the document states. can be consulted here (in English).
The blow of monetary austerity to the economy
Last week, a report from the Bank of Spain indicated that the ECB’s interest rate increases since 2022 have subtracted 2.5 points from Spain’s growth in the last three years, and will still continue to hit GDP growth (Producer Interior Gross) in 2025. The Bank of Spain estimates that the damage from monetary austerity to the real economy will reach close to 40 billion euros in total from 2022 to 2025.
Meanwhile, the institution led by José Luis Escrivá points out that the “tightening” of financing conditions has barely reduced the average inflation each year by a few tenths, but celebrates that it has been “fundamental in anchoring expectations” regarding price increases.
According to their calculations, the increases in the official ‘price’ of money that the ECB began in June 2022 to fight inflation subtracted half a point from the growth of economic activity in 2022, in full recovery from the shock of the pandemic, just over one point in 2023 and almost another point in 2024.
Central banks assume the damage to the real economy (to families, to companies…) as part of their strategy to fight inflation. Monetary austerity is effectively a way of suffocating household demand and companies’ ability to invest by making mortgages and loans in general more expensive. In the 2022 annual reportthe Bank of Spain pointed out “the transmission channels” of interest rate increases. Of all of them, the “intertemporal substitution effect”, which refers to “the contraction of spending” due to the increase in the ‘price’ of money, has been the main blow to the economy. The next was “the income effect”. Or, what is the same, “the contraction of spending” in this case due to “the decline” in the income of families or companies.
According to the Bank of Spain’s own scheme, interest rate increases will continue to damage “demand” in the coming months, although in June 2024 the ECB decides to begin retracing monetary austerity.
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