• The ECB does not slow down despite the economic slowdown and the wear and tear of households: it undertakes the tenth rate hike in the Eurozone and places them at 4.5%

The European Central Bank (ECB) on Thursday cleared all doubts about the path it would take in the most controversial meeting to date. Finally, the agency decided by "a solid majority" to raise interest rates in the Eurozone for the tenth consecutive time, driving the refinancing rate – the one that marks the interest charged for loans such as mortgages – to 4.5%, which are maximums of 2001, and the deposit rate to historical levels of 4%. The result of the vote is striking considering that neither of the two most hawkish governors (or in favor of containing inflation by raising rates) had voting rights this time, as are the German Bundesbank and Belgium.

After the last hike yesterday, everything indicates that the official rates of the euro zone have peaked. There will be no more increases, so that at the meetings of October and December (the two missing in the year on monetary policy) the Governing Council of the ECB will be inclined to pause, predictably, in an escalation that is unprecedented in the history of the institution, although the president of the ECB, Christine Lagarde, He preferred not to say so outright. "What we have decided, and it has been reflected twice in today's statement, based on all the numbers and forecasts that we have available is that we consider that interest rates have reached levels that, maintained for a sufficiently long period, will contribute substantially to the prompt return of inflation to target," the ECB chief said during her appearance.

The market's focus has now shifted to assessing how long the long enough that the ECB has been repeating as a mantra for months to control inflation amounts to. Lagarde said publicly yesterday that it was not on the table this occasion to determine the period for which official rates will remain at maximums, but the truth is that the estimates of all analysts speak, at least, of the summer of 2024. This implies that, if true, and the estimates are met, the ECB could lower rates in June/July of next year, which implies that for those households that have signed a variable-rate mortgage they will not enjoy some respite until September 2024, when the quota is recalculated with lower rates than the current ones. It should be remembered that Spanish banks, as a general rule, take as a reference the closing of the Euribor two months ago to recalculate monthly mortgage payments. Meanwhile, the ECB will use the tools at its disposal to complement high rates with lower asset purchases (through the PPP programme), which is a way of draining the liquidity that has flooded the market. This will also affect the PEPP, the specific Emergency Programme that was created in the wake of Covid.

The ECB, which says it is aware of the impact that its restrictive policy is having on European society, has undertaken a movement of such virulence that it has not allowed the most vulnerable households to adapt to the new situation. The last time the Central Bank carried out a sustained increase over time was between 2005 and 2007, when it raised official rates up to eight times, from 1.25% (from 1% set in 2003) to 3.25% in July 2008. On this occasion the ten increases have occurred in less than fifteen months.

Lagarde is aware of the criticism, but it is true that this week's decision was going to raise blisters regardless of the outcome. "The battle against inflation is making progress. In October we were at 10.6% and it has fallen by half. Is it satisfactory? We are doing this not because we want to provoke a recession, but so that the less privileged population can have price stability," Lagarde said when asked by reporters.

The central bank's goal is to cool the economy in such a way as to depress consumer demand sufficiently to cause prices to fall significantly. But this is a very difficult carom to achieve without overflowing the glass somewhere. The ECB speaks of a "strong transmission" to the economies of its monetary policy, a discourse that it has been modeling in its latest interventions, but it seems that the contagion is already unstoppable. This has caused a "significant" reduction, says Frankfurt, of the growth forecasts for this year that go from 0.9% in June to 0.7% today and from 1.5% to 1% in 2024 which is where the earwig is really noticeable. Looking ahead to 2025, the ECB forecasts a GDP increase of 1.5%, only one tenth lower than the 1.6% previously forecast.

He does not say it openly, but with the year 2023 practically closed, what worries the Governing Council is 2024. By then inflation will exceed 3%, when in June it was expected not to be much beyond those levels and behind this increase is the rise in the price of energy, which should not be a problem this last quarter because for the CPI the annual comparison with 2022 is very beneficial. That's when gas soared in the market in the face of the war in Ukraine.

The impact on the real economy of the new monetary policy of the Eurozone has caused, for example, that for the first time the profits of companies have been affected by the wage increase, clearly inflationary, that has been taking place in recent quarters in most EU countries. The profits of the companies that until now absorbed the highest cost per employee no longer give for more and this has lowered their growth forecasts.

Lending continues to fall, especially as demand from households and firms has plummeted in the face of higher financing costs. The ECB speaks of "the largest contraction in history" in requests for bank loans by European families. To this we must add that the prices of the shopping basket remain out of control, with growth rates of 10% in August for food and statistics show that households with lower incomes are the most affected both by the rise in mortgage payments (since they have less bargaining power) and by the rise in prices in supermarkets. Likewise, the ECB has also attributed the collapse suffered by the residential real estate sector, because the commercial sector, stressed Luis de Guindos, vice president of the ECB, had already been suffering the consequences of the crisis of shopping centers in the US, the pandemic and teleworking before the Central Bank began to squeeze the economy.

  • Christine Lagarde
  • European Central Bank