Since Christine Lagarde decided to raise interest rates in July 2022 after a decade of frozen, it is the first time that there are serious doubts about the decision that the European Central Bank (ECB) will finally adopt in the Governing Council that will conclude today. Until last July 27, the central bank has carried out the fastest and steepest escalation of rate hikes in the short history of the institution. On nine occasions Lagarde has communicated to the market a new increase in reference rates in Europe to try to curb the inflation that is running wild, above 5% in the euro zone, and, above all, very far from the single mandate of the ECB: a CPI at 2%.
In the last few hours the balance that calibrates how the pulse is in the monetary policy of the Eurozone has clearly tilted towards the hawkish side (more aggressive) again. Ten days ago the possibilities that the market gave to a new rise in September were 20% and the first pause of this race that the central banks of half the world to contain prices was already on the horizon. But yesterday those probabilities increased to 70%, according to data collected by the Bloomberg agency, after part of the new macro table of ECB forecasts, which are not positive in terms of inflation, was leaked.
According to Reuters published this week the Central Bank will increase its CPI forecast in the euro zone beyond 3%, compared to the current 3%, for 2024 and is news that inevitably reinforces the idea of further monetary tightening. Exceptional policies for a situation never seen before. Hence the criticism that the ECB has consistently received. Throughout its history it has never faced a scenario of such high inflation and this suggests that, progressively, Lagarde will introduce into her speech the idea of a new inflation target, more realistic and closer to 3% for the medium term.
The ECB will also revise its forecasts for the European economy. The latest data for June predicts a growth of 0.9% of Community GDP, 1.5% in 2024 and another 1.6% in 2025. In any case, the Central Bank was confident that the Eurozone will avoid the technical recession of the beginning of the year.
To date, its crusade against such high prices has had a relative impact, dropping from 10% rates seen at the end of 2022 to 5.3% in July. But from then on the road is much rockier, according to analysts, since the adjustment will require more time than desired. The ECB, which repeats its data-dependence every time it has the opportunity, is waiting to really see a cooling of the European economy, despite the collapse of the granting of loans (due to higher financing costs) and the rise in mortgage prices.
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.
The Euribor, the main indicator to which banks refer to the mortgage rate, has risen by more than 450 basis points since the middle of last year, when it came to trade in negative (-0.5%). This has meant that many families have seen how the monthly installments for the payment of their home have skyrocketed in the last 12-14 months, taking into account that for the revision of the rate (generally, on an annual basis) the Euribor of two months ago is taken as a reference. It is something that, however, is not noticing the bank, where delinquency remains at minimums of 3.5%, with data from August. What has risen considerably are loans under special surveillance (those that have not yet defaulted, which occurs with three consecutive months without paying the installments, but are close to doing so), which have rebounded by 18% from March to March 2023, the latest data published by the Bank of Spain in its Financial Stability Report and this is being closely followed by the sector. In March the Euribor closed the month with an average of 3.6%.
If the ECB decides today to touch interest rates again, the tenth increase will take the main financing rate from 4.25% to 4.5%, highs of 2008 and very close to the historical ones of 2000; and will lead the deposit rate to levels of 4%, something never seen before, from the current 3.75%.
This is what they believe from Bank of America who consider that the ECB will take only "one more step" and it will be today in the three reference rates. "We expect the first downgrade for June 2024 at the earliest. It will depend on the inflation data for September, which could make us delay this vision, "say in a report the analysts of the US bank.
Another investment giant, Nomura, is positioned on the side of the announcement of a new rise on Thursday and believes that the ECB will cut its forecasts on the growth of the euro zone economy, to 0.7% for 2023 and 1.3% in 2024, as well as expect an increase in expectations for inflation, of 0.2 points this year, up to 5.6% and that will reach 3.2% in 2024 and this is the most relevant data to take into account in this decision. It will be communicated by the ECB at 14.15.
- European Central Bank
- Christine Lagarde