the ECB will hit hard again to curb inflation

There seems to be little suspense: the European Central Bank’s rate hike should still stand at 75 basis points. The financial institution must, in fact, announce, this Thursday, a new tightening of its monetary policy to try to stem inflation which in September reached 10% in a year within the euro zone (the 19 countries to have adopted the single currency).

This will be the second consecutive time that the ECB’s 25-member Governing Council has opted for an increase of 75 basis points. On 7 September, the European Central Bank had already made an increase of the same size, after raising interest rates in July for the first time in ten years, by 50 basis points. This increase put an end to more than a decade of extremely low or even negative interest rates and today the rate on bank deposits with the ECB, which is one of the three key rates to which it refers, currently stands at 0.75% . With the hike expected on Thursday, it would then approach a level of 2%, which is considered more or less neutral for activity.

ECB President Christine Lagarde warned in September that rates were firm ” distant ” of a level that “will help bring inflation to 2%”. He had therefore stated that the following increases, which “it will depend on the data” cheap, it had to “To be of a breadth that brings us closer together more quickly” of that goal, ensuring that the ECB would do so “keep raising rates”.

Read also ECB: to what extent to raise rates to bring inflation to 2%? And should we stick to this goal?

The Frankfurt institution appears to be modeling its action on the US Federal Reserve, which could raise its key rate by 0.75 percentage points again in November, as in the previous three meetings, according to economists. But in the United States, inflation is fueled by household spending aided by Washington during the pandemic, while in the euro zone it is the prices of energy and imported raw materials that drive the aggregate up.

Risk of recession

This policy is not without consequences for the euro area economy. The containment of demand in order to slow down inflation can, in fact, prove detrimental to growth in the euro area and cause a recession. This scenario also seems to be becoming increasingly clear, in the words of the vice president of the ECB, Luis de Guindos, on 14 October. According to him, a lasting interruption of Russian gas flows to Europe could cause a recession of almost 1% in the euro zone in 2023. A scenario already assured for Italy and Germany according to the IMF. The leading European economy, for example, is expected to see its GDP drop by 0.4% next year. In a context of economic slowdown, the Frankfurt institute is therefore a delicate choice, but the guardians of the euro believe that raising prices would be even more damaging.

Read alsoA slight recession, is it that bad?

However, some Member States are concerned about the consequences of these successive increases, such as Emmanuel Macron who urged not to do so. “breaking question” contain inflation. Underlined the new Italian Prime Minister, Giorgia Meloni, who took office this week “the risk” of a rise in interest rates, in particular “For Member States with high public debt”. Berlin is not on the same wavelength and it is important in the eyes of the German government not to “do not oppose the measures of the central banks” from too much demand support. But that doesn’t stop him from relieving German consumers of runaway inflation, as he does with his huge € 200 billion plan to limit energy prices.

A budget of 8,800 billion euros

The ECB is also expected to use this week’s meeting to discuss the alignment of other monetary policy tools with its efforts to fight inflation. When it came to supporting prices in the anti-crisis plans, several waves of giant and economic loans (TLTRO “) were granted to banks. A large part of TLTRO “will be repaid by the end of 2023 and the ECB could encourage banks to do so early to put an end to an unexpected effect, namely the profit made by banks by placing their cash with the ECB as the deposit rate now reaches 0 , 75%, will soon be more.

The ECB also knows that it should reduce its balance sheet, which has risen to € 8,800 billion as a result of its asset purchase programs to support the economy. But, given the risk of shaking the financial markets, analysts believe that the beginning of any “Quantitative tightening” – don’t reinvest maturing bonds – it’s still a long way off. “The recent events in the UK, which forced the Bank of England to turn around on bond purchases, could be seen as a useful reminder that any aggressive liquidity withdrawal risks being very disruptive to the bond market and the transmission of policy “notes Frederik Ducrozet, chief economist at Pictet Wealth Management.