• What will the ECB do today? The market opts for the tenth interest rate hike in 15 months

The last-minute forecasts that tipped the balance towards the side of a new interest rate hike have come true. The European Central Bank (ECB) is going to carry out what will be the tenth increase in official rates in the Eurozone, which will lead to the refinancing rate from the current 4.25% to 4.5%, which is only one more hike away from matching the historical highs seen in October 2000. It will also drive the deposit rate to its all-time high, at 4%.

Hunting down inflation remains the central bank's main objective, its only mandate, and the latest data have weighed on a decision that, however, has kept the market on tenterhooks in recent weeks because it was not at all clear what the outcome of the vote would be. The CPI of the Eurozone stood at 5.3% in August, stable on the figure for July, and this implies having broken a downward trend that lasted since last May, when inflation fell from 7% in April to 6.1%.

Finally, the revision of the ECB's macroeconomic picture confirms an increase in its estimates on prices in the euro zone both for this year and for 2024. Specifically, the agency now forecasts an average CPI for 2023 of 5.6%, 3.2% in 2024 and 2.1% in 2025. "The upward revision for 2023 and 2024 mainly reflects a higher path in energy prices," the ECB said in its note on Thursday.

Above the Frankfurt target of 2%, all the major economies are placed, including Spain, where the CPI rose again in August to 2.6%. From there, everything else is a concern. Prices in Eastern European countries are still growing at rates closer to double digits, at 10%, in Germany it exceeds 6%, Italy is also above the Community average, over 5.5% in August and in France the CPI increases at year-on-year rates of 4.8%. "Everyone has been surprised at the magnitude and duration of inflation," ECB sources say.

What will mean a new effort for variable-rate mortgages (because undoubtedly banks are going to transfer this new increase in monetary rates to financing costs) may also be the last. The market was pricing in a rise of more than 0.25 basis points in policy rates by the end of the year and there were three possibilities, in September, on October 26 and at the monetary policy meeting that will close the year on December 14. So what lies ahead is a pause and see how the contagion of such an aggressive policy by the ECB that is unprecedented is filtering through the different strata of the economy.

Sources from the institution itself acknowledge being especially concerned about countries such as Spain, which they place in first place, ahead of Portugal and Ireland, due to "a higher rate of mortgages granted at variable rates (...) something that contrasts with Germany" where a fixed rate prevails for ten or fifteen years that has not yet harmed the pockets of the Germans.

This was a complicated vote to stay out and the first in which the division between hawks (the most aggressive from the point of view of monetary policy) and doves has been felt within the institution for weeks. But the ECB's rotation system is already predefined and only the members of the executive, six in total with Lagarde and Luis de Guindos at the head, have permanent voting rights. A further fifteen votes are available and are distributed by the Member States and which change every month. This time some of the most hawkish countries throughout the Eurozone such as Germany and Belgium have been left out of the vote, also Estonia and Ireland tend to have a more favorable profile to raise rates in order to contain inflation and only Greece, which has not been able to vote either, has a totally opposite profile and in favor of more lax policies to help the economy.

This is something that extends by definition to all southern European countries. Spain, represented by the governor of the Bank of Spain, Pablo Hernández de Cos, along with Italy, Malta and, of course, Cyprus, appears on the more dovish side of the table that analyzes the profile of each member of the ECB. For its part, the vote of France, Finland and Luxembourg could have tipped the balance in favor of the yes because there were seven other votes clearly in favor of an increase in rates in Europe, including all of Eastern Europe, along with Austria and the Netherlands.

  • Christine Lagarde
  • European Central Bank