The European Central Bank (ECB) has decided to increase interest rates again this Thursday, but at a more moderate pace, to contain inflation. The entity’s Governing Council, meeting in Frankfurt, has decided to raise the price of money by 25 basis points -as it did in May- and place it at 4%, levels that have not occurred since the 2008 financial crisis. For the eighth rise, the Eurozone is approaching all-time highs and, as its president, Christine Lagarde, warned in her appearance this Thursday, “if there is no base change, we will raise interest rates again in July.”
Eurozone prices experienced a significant fall of nine tenths in May and stood at 6.1%, according to data from the European Statistical Office (Eurostat). The ECB notes that inflation has come down but is expected to remain “high for too long” and is committed to ensuring that it is contained below 2% again over the medium term. «The possibility of stopping the increases is not on the table. We have not discussed it because we have work to do,” Lagarde said. According to the June macroeconomic projections, inflation in the Eurozone will close the year at 5.4%, before falling to 3% next year.
The pressure of underlying inflation – that which excludes the price of food and energy – remains strong, “although some indicators show signs of weakness.” However, Lagarde points out that this rate “has not yet reached its peak.” The increase in labor costs -due to the drop in unemployment and wage increases in some Member States- have increased inflationary pressure, which has contributed to revise the forecasts for this rate upwards, which will remain at 5.1% this year, before falling to 3 and 2.3% in 2024 and 2025, respectively.
The entity closely monitors this rate, in addition to the transmission of monetary policy to the real economy. For the moment, previous rate hikes are “gradually” being transmitted to the economy: borrowing costs have risen sharply and the ECB argues that “tighter financing conditions are key to further lowering inflation.”
Several weeks ago, the German Isabel Schnabel – member of the executive board – pointed out that this process “takes time” and that there is “great uncertainty” about the strength and speed with which its effects will be noticed. In fact, the ECB points out that this “delay” in the transmission of its decisions is between 18 and 24 months. This situation is especially worrying in the eastern countries, where inflation exceeds double digits; but also to others such as Spain, Belgium and Luxembourg, where inflation is lower and rate hikes threaten to jeopardize economic growth.
Data on economic developments published this month by Eurostat indicate that the Eurozone entered a technical recession in the first quarter of 2023. In this sense, Schnabel acknowledged that the ECB must assume “certain risks”, stressing that “the risks of acting little is still greater than doing too much’. From now on, the entity will continue to base its decisions on the evolution of inflation, the underlying rate and the effectiveness of the transmission of monetary policy. For the time being, the institution has revised economic growth slightly downwards and expects the economy of the euro countries to end 2023 with an advance of 0.9%, before picking up 1.5% in 2024 and 1. 6% in 2025.
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