Inflation: what are the consequences of the tightening of the ECB? – Economy



This is a strong signal that the European Central Bank (ECB) gave Thursday of its willingness to fight against rising prices. This reached 8.1% yoy in August, a level well above the 2% target set in the mandate given to the central bank by the 19 euro area member countries. Faced with the risk of inflation, Christine Lagarde and the Governing Council of the ECB decided on Thursday to raise the reference rate by 75 basis points.

Since the beginning of the summer, interest on bank deposits with the ECB increased for the first time in July from -0.5% to 0%, to now reach 0.75%. An increase of unprecedented magnitude for 20 years. “It is a largely justified decision because inflation in the euro zone is expected to reach 10% early next year,” said Patrick Artus, adviser to the Natixis bank. With nominal interest rates at 1.25%, real interest rates remain impressively low at -8.75%! The tightening of monetary policy is still ridiculously small compared to the magnitude of the price increase. “

More difficult loan terms

The disruption of Russian gas supply to Europe will also delay the expected decline in inflation. “Unlike in the United States, inflation in Europe does not result from excess demand, but rather from an energy shock that spreads throughout the economy,” said Christian de Boissieu, professor of monetary economics at Paris 1. Pantheon-Sorbonne. If it fails to break the inflation rate, the ECB’s decision was however necessary to assert its credibility to achieve its price stability target ”.

For those wishing to acquire real estate, the terms of the loan will become more difficult

The tightening of the ECB will have the effect of tightening financing conditions. It will become more difficult to get into debt to buy a car or a house. “Short-term loans will see their costs rise very quickly, which will have a negative impact on household consumption,” predicts Christian de Boissieu. For those wishing to acquire real estate, the terms of the loan will also become more difficult. The effect will be the same for companies that see their funding dry up.

Towards greater unemployment?

Ultimately, a slowdown in economic growth is to be expected. “If the ECB wants to fight inflation, it must prevent wage increases from accelerating, and therefore its policy must lead to an increase in the unemployment rate,” explains Patrick Artus. Until then, fear of the recession held back the ECB’s action. But a hard line prevailed, led by the German Isabel Schnabel at the Governing Council of the ECB. Inflation must be tackled “even at the risk of weaker growth and higher unemployment”, you said at the end of August.

However, the upward trend in interest rates shouldn’t stop there. Interest rates in the United States (2.25%) are in fact much higher than in Europe. “The ECB must also contain the decline of the euro against the dollar, Judge Christian de Boissieu. If the euro falls further, the oil bill mechanically increases, which is equivalent to importing inflation ”. The US Federal Reserve could raise rates again on 21 September.

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