The meeting of the members of the Governing Council of the ECB held last Thursday European Central Bank (ECB) was one of the most difficult in my memory. Neither option that the euro zone’s top monetary policymakers had was easy: raise interest rates again and sacrifice economic growth, or keep them in place and condemn the entire 20 to higher inflation for an extended period of time. The ECB preferred to play the first card and delay the eurozone’s economic recovery until 2024 in return for lowering inflation once and for all.
If there was something missing from the government council meeting last Thursday, it was unanimity. The decision was only made with a “solid majority” as the governors of the national central banks of the Eurozone Hawks j Pigeons They were more divided than ever based on their preferences when voting on monetary policy decisions. For the first time in a long time, the market could not clearly predict what decision the ECB would ultimately make.
The hard line prevailed and the final decision was to raise interest rates further with a new increase of 25 basis points. A decision that came with a review of the ECB’s macroeconomic forecasts a reduction in expected growth for the Eurozone in 2023, 2024 and 2025.
Specifically, the Eurozone’s gross domestic product (GDP), which grew by 5.6% in 2021 and 3.4% in 2022, will only grow by 0.7% this year (versus 0.9% last year). , the next by 1% (versus 1.5%). According to ECB estimates, the increase in 2025 will be 1.5% (previously 1.6%). All three forecasts represent a downward update.
On your part inflation, after rising from 2.6% in 2021 to 8.4% in 2022, will be reduced to 5.6% in 2023 and to 3.2% in 2024 and will not report to the ECB until 2025 -Approach target of 2.1%. Inflation forecasts for this year and next represent an increase, while those for 2025 represent a decrease.
(ECB nears end of rate hikes, but Lagarde warns: ‘We can’t say they have peaked’)
The ECB is therefore drawing a scenario with low growth, shortly before stagnation this year and still high inflation, which has prompted the ECB Governing Council to tighten monetary policy even further. The reason for these corrections is the future growth of energy prices.
It remains to be hoped that the ECB is correct in its diagnosis of the economy in the Eurozone and will finally put an end to high inflation with its monetary policy decisions great variety that exists between countries. While in Belgium (2.4%), Spain (2.4%) j Cyprus (3%) interest rates are recorded close to the ECB target, Slovakia still facing inflation of 9.6%, Croatia one of 8.5% and Austria one of 7.6%, according to the first estimate of August data released by Eurostat.
The recovery that doesn’t come
The average for the euro countries is still 5.3%. And near that level it will close this year “Hard times,” as Christine Lagarde said on Thursday, “are now.”. “The recovery we expected postponed until 2024“ added the President of the ECB in the press conference after the Governing Council meeting.
And the prospects for this year are virtually stagnant. The forecast of GDP growth of more than 2% in 2023, which the ECB made in June last year shortly before the interest rate hike began, is far away.
Tighter financing conditions for more than a year and continued high inflation across the region are having an impact on the economy, with the ECB only expecting growth of 0.7% this year. There are ten interest rate increases between the two forecasts which increased in general interest rate from 0% to 4.5% (from -0.5% to 4% in the case of the deposit facility).
Lagarde himself recognized it a few days ago. “The lower demand for exports from the Eurozone and the impact of the strained financial situation are slowing growth, including through lower investment in residential real estate and businesses,” he said at the press conference.
Take your foot off the accelerator pedal
Something that could cause the ECB to take its foot off the accelerator to avoid a major impact on the economy. For now, the ECB Governing Council has already indicated that Thursday could be the last interest rate hike of the cycle, although Lagarde wanted to curb optimism (perhaps in view of the collapse of the euro). One cannot say at this point that the peak has been reached..
“The macroeconomic outlook is becoming increasingly bleak,” he explains. Wolfgang Bauer Manager of the public fixed income team M&G Investments in his opinion “There is a fine line between fragile growth and Crash landing a scenario that the ECB would like to avoid.”
“Not raising interest rates for now could be the best option, as further hikes could push some parts of the eurozone into recession,” this expert adds.
The ECB is doing everything it can to maintain the balance between fighting inflation and not stimulating the economy.. Therefore, not all members of the ECB Governing Council agreed to another interest rate increase on Thursday.
(The ECB continues its fight against inflation, raising interest rates by 0.25 points to 4.5%, the highest level since 2001)
“We see the risk of a policy mistake increasing, but hope that the easing cycle does not start before the third quarter of 2024,” he warns. Martin Wolburg senior economist Generali Investments.
Furthermore, it is possible that the ECB will have to revise its downward forecasts again, as it is now considering MFS Investment Management.
“Lagarde noted that the risks are actually to the downside. Survey indicators continue to point to a slowdown and we remain aware of the extent of monetary tightening that is still reflected in the real economy,” explains Head of Sovereign Debt Analysis in Developed Markets, Peter Goves.
However, the ECB remains optimistic in this regard “Growth will recover in 2024”. “Now of course we have to be successful, we have to reduce inflation and we have to maintain salaries and employment,” Lagarde added.
The market is currently celebrating this possible end to interest rate hikes, although we will have to wait and see whether the ECB was right in its policy and there is no need to increase the price of money again. The economic stability of the Eurozone depends on it, so the path taken should be the right one.
