The ECB just raised interest rates to 4.50%. Let’s see, it’s clear that inflation is falling slower than everyone would like. What is not possible, however, is to go from a Euribor that is around 0% to 4.50% in fourteen months. Among other things, because neither families nor companies have time to adjust their economy, their spending and their budget. Honestly, I think so The ECB is stepping on its brakes. And I say that for several reasons.
The first is that you have to have a little more patience. It takes a few months for interest rate increases to translate into inflation. You become very nervous. Prices are rising and if prices don’t fall as expected the following month, I insist. Some peace please. Give your money decisions time to be absorbed by the market. And all the more so when we consider that inflation is one of those economic phenomena that brings with it inertia. When it starts hard, it’s difficult to stop it.
Second, this is supply-side inflation. Although we are already in the situation where inflation causes inflation (second round of inflation), but Prices are not rising because the economy is growing at double digits or because consumption is overheating due to out-of-control credit. Rather the complete opposite. The ECB itself has always recognized the different causes of inflation: supply chain crisis; Ukraine conflict; gas and oil; Electricity; Raw materials… All reasons given are relevant to delivery. Absolutely everyone! And yet it attacks the ability of citizens and companies to buy and invest.
It’s as if I told my son that all of us parents will cut our children’s weekly allowance to see if the shopkeeper who sells them sweets and candies before school lowers the prices because he raises them too much has. And it turns out The shopkeeper limited himself to passing on the increased cost of some foreign-made sweets.
In 1973 the oil crisis occurred, followed by the supply shock of 1974. Inflation was 17% in Spain and 12% in the United States. Interest rates were raised only temporarily, but the U.S. economy grew steadily between 7% and 10% over the decade. In the event of double-digit GDP increases, the rates can be increased. But With the economy on the verge of a recession, one must be very careful.
The third reason is that I strongly believe that the ECB is carrying out a very economic, statistical and mathematical analysis. Forget that numbers are statistics, but then there is what people actually do. GDP is the GDP, but inflation or CPI is the sampling measure of the increase in sales prices. This does not necessarily mean that families have to bear these higher costs! There is what I call that personal inflation, that is what every person builds from their consumption habits. Families can increase their spending less than the CPI thanks to brand changes, choose different outlets, more Discount, etc. That is, Citizens can defend themselves against inflation, but they cannot defend themselves against interest rate increases. If GDP is holding up reasonably well, that’s why.
Finally, the ECB itself has recognized the recent errors in its overall analysis and diagnosis of the nature of inflation. What will it tell us if prices continue without correction after the tariff increase? Because Lagarde said this week that inflation could certainly be tamed if interest rates were maintained for a while. They will tell us: “Oh, sorry, we see that the rate hike wasn’t the medicine.”
The damage will already be done because I assure you that the rise in interest rates is doing more damage to families with mortgages than inflation itself. And the same goes for businesses.
If the ECB wants to withdraw liquidity from the system, it has other, more urgent means at its disposal. Stop funding inefficient states, stop being complicit in escalating public debt caused by corruption and political bifurcation, and finally withdraw the enormous liquidity that has flowed into the financial system during the pandemic.
By the way, inflation in the United States as a result of the 1974 oil crisis was resolved very quickly. And the solution wasn’t interest rates.