Caught up by inflation records, the European Central Bank (ECB) accelerated the tightening of its monetary policy by deciding to raise its interest rates on an unprecedented scale. The Monetary Institute’s Board of Governors has decided to raise key rates by 75 basis points, a first in two decades of existence – apart from a technical adjustment in 1999.
Serving as a reference in a context of abundant liquidity, the rate on bank deposits at the ECB, reduced from -0.5% to 0% in July, thus rose to 0.75%.
The other two key rates, the one applied to banks on refinancing operations over several weeks and the one targeting the day-to-day marginal lending facility, go to 1.25% and 1.50% respectively. Rate hikes should encourage savings and reduce consumption, to reduce pressure on prices.
The specter of inflation
The ECB has also declared that inflation in the euro zone will remain “far too strong” on a “extended period”having sharply raised its forecast for price increases for 2022 and 2023 amid soaring energy prices linked to the war in Ukraine.
The institution now expects inflation of 8.1% in 2022, compared to 6.8% in June. For 2023 and 2024, the guardians of the euro expect 5.5% and 2.3% respectively, still above the 2% target.
Energy in the background
“We had different points of view around the table, an in-depth discussion, but the result of our discussions was a unanimous decision”declared Me Lagarde during the conference following the monetary policy meeting. “For those who keep saying that the ECB is lagging behind, I would argue that we are on a path that started in December.”
However, she tempered, pointing out that the rates of the European Central Bank are still “far” of a level that “will help bring inflation down to 2%”. As a result, the following increases, which “will depend on the data” economic “must be of a magnitude that brings us closer together more quickly” of this objective, she added after a meeting of the Board of Governors, assuring that “We will continue to raise rates”.
She also addressed the “recession” which threatens the euro zone for the year 2023 in the event of “total cut” Russian gas deliveries. A “pessimistic scenario” forecast prepared by the monetary institution, “including a total cut off of Russian gas supplies”anticipates “a recession for 2023”she said. “We are almost there” after the closure of the Nord Stream gas pipeline, added Ms. Lagarde. The President also acknowledged that at ECB level, mistakes had been made. “We made forecasting errors, as all international institutions have done and as most economists have done, because it is virtually impossible to anticipate and include new models like Covid, the war in Ukraine, energy blackmail”said Ms. Lagarde, saying in “take responsibility”.