The European Central Bank is expected to raise its key rates again on Thursday in the face of inflation deemed still too high, despite discontent in some countries against the risk of weakening the economy. A year after kicking off the fastest rate hike cycle in history, the euro's guardians are staying the course, even as the peak appears to be getting closer. ECB President Christine Lagarde already announced in June a "very likely" further increase for Thursday's meeting of her Board of Governors. “Virtually everyone expects an increase of 0.25 percentage points,” like in June, said Joachim Nagel, director of the influential German central bank, said last week. This would bring the bank liquidity deposit rate at the ECB, which refers, to 3.75%.
After that ? The interest of the meeting “will rather focus on the indications that the ECB could give on the future direction of monetary policy”, according to Eric Dor, director of economic studies at the IESEG School of Management. With the September meeting in sight. To fight against record inflation in the euro zone following the post-pandemic recovery and then the outbreak of the Russian war in Ukraine, the ECB has since last July raised its key rates at unprecedented speed, raising them by 400 basis points in one year.
This policy increases the cost at which businesses and households borrow, which should lead to a drop in demand and therefore in economic activity. The ECB's hope is that this will reduce the ability of businesses and businesses to raise prices, while moderating wage demands. The institution feels in a hurry to drive the point home even further because, excluding energy, the slowdown in price growth is still very limited.
From a record 7.9% in March 2023, the aggregate (indicator used by the ECB for inflation) fell timidly to 6.9% in June 2023. This makes Christine Lagarde say at will that the ECB still has “some way to go” to influence prices.
The ECB will decide on Thursday the day after the US Fed, which is expected to announce another rate hike, the eleventh since March 2022, after observing a pause in June. Recent data shows that the Fed's policy is calming inflation without causing unemployment to rise.
Nevertheless, in the euro zone, the restrictive monetary policy is going increasingly badly with certain fragile European economies. Further rate increases induce "higher risks of creating a more difficult situation for growth at European level", Portugal's Finance Minister Fernando Medina said in mid-July. Before him the head of the Italian government Giorgia Meloni had criticized at the end of June the "simplistic recipe" of the ECB consisting in raising interest rates to fight against inflation, fearing that "the remedy will prove more damaging than the disease".
Central bankers in the euro zone have inflation as a compass and “the costs if we do too little” on rates “continue to be higher than the costs if we do too much”, retorts Isabel Schnabel, member of the executive board of the ECB. Same story with the President of the Central Bank of Germany Joachim Nagel, a "hawk" follower of a rigorous monetary course, according to whom inflation is "a greedy beast" and "releasing the fight too soon (would be) a mistake". His counterpart at the Bank of the Netherlands, Klaas Knot, is more measured, believing that another rate hike in September is “at best a possibility, but certainly not a certainty”. An increase in July should be enough and a further tightening could “harm the economy”, warns the governor of the Bank of Greece Yannis Stournaras, a “dove” in favor of a more lax monetary policy.