The world is stepping on the accelerator to get out of the era of negative interest rates. The explosive inflation that has aggravated the war in Ukraine has prompted central banks around the world, from Australia to England, to raise interest rates from historically low levels. The energetic decision of the Federal Reserve to carry out the biggest increase in 22 years puts more pressure on the European Central Bank (ECB), whose leadership assumes that it will make the price of money more expensive in the second semester. The question is when. And there they hawks They are already beginning to prepare the ground for a possible first movement in July.
After a decade of anemic price rises, the inflation rate in the OECD as a whole climbed in March to 8.8%, the highest since 1988, on the back of soaring energy rates. The response has been almost unanimous around the world: the Federal Reserve raised the price of money by half a point, while the Bank of England raised it another quarter point. Only Japan, with inflation at 1.2%, and Switzerland, at 2.4%, remain outside this trend. In addition to the ECB, which continues with rates at 0%. But now everything indicates that this will change soon.
In just half a year, Frankfurt has gone from disdaining a rate hike in 2022 – in December, President Christine Lagarde considered it “very unlikely” – to speeding up the end of debt purchases to start putting a cost on money . Financial sources maintain that the markets expect at least two increases, but several members of the Governing Council in recent days have even opened the door to three movements. Everything will depend on when the debt purchase program ends, since the highest body of the ECB has promised to take one step after another to avoid a slip like the one that Jean-Claude Trichet gave in 2011, who decided to increase rates to mistime.
The sequence consists of first ending net purchases of bonds and, some time later, raising rates. The ECB decided in April that the program would end in the third quarter, but without clarifying exactly when. That led markets to speculate on September. However, the Vice President of the ECB, Luis de Guindos, and the member of the Executive Council Isabel Schnabel have suggested that the increase could take place as early as July. “From my point of view, a rate hike in July is possible,” Schnabel said in an interview with the German newspaper Handelstblatt. The opinion of the German is in line with that of the hawks, within which it is framed. However, those voices are also heard on the other side. This is the case of the Governor of the Bank of Finland, Olli Rehn, who has also opted to raise rates in July.
High inflation in the euro zone, 7.5% in April, has fueled the demands of the North. The toughest of that bunker, the Austrian Robert Holzmann, has asked not to wait any longer and that the increases be discussed already in June. Antoni Garrido, Professor of Economics at the University of Barcelona, believes that the advocates of keeping rates at 0% have little to do now. “The ECB will have to act, since its objective is price stability, although it has also assumed de facto financial stability. So this rate of inflation leads you to intervene,” he maintains.
Impact of the war
He knows in depth all the sides of the coin.
However, Fabio Panetta, also a member of the Executive Council and identified within the most lax sector, has defended this week waiting to know the economic growth figure for the second quarter. That data is scheduled to be published by Eurostat on July 29, so the rise in interest rates would not take place until September. “The evolution of GDP in the first quarter only partially reflects the impact of the war. We have to wait for the second quarter data to get a clear picture. Our monetary policy is guided by the data and we cannot make decisions before seeing it”, he maintained in an interview on The stamp.
The Italian put on the table another of the variables that the ECB is calibrating to embark on this path: the impact of the war in Ukraine on growth. The United States started the year with a contraction of its economy, while the euro zone advanced only 0.2%. “We cannot control inflation on our own without generating high costs for the economy. We need to act on multiple fronts, not just through monetary policy,” Panetta said in the interview. However, analysts see in the words of the Bloomberg considered to be the most influential of the group of pigeons a call to tighten monetary policy calmly. “Even Panetta has admitted that the monetary expansion program and negative rates are no longer necessary,” says the economist senior for Europe from Capital Economics, Jack Allen Reynolds.
The ECB’s plan is still far from the one projected by the Federal Reserve, which is already preparing to reduce its balance sheet. Still, Schnabel has also pointed down that path. “We will continue to reinvest bond maturities for an extended period after the date we start raising interest rates. But in principle it makes sense to gradually reduce bond portfolios at some point in the future. For now, these purchases constitute the Eurobank’s weapon to curb its great fear: that the rise in rates will end up triggering risk premiums in the countries of southern Europe. Some sectors are considering creating a specific instrument to put out any fire that could resurrect the ghosts of 2012, although for now the ECB continues to give priority to existing mechanisms.