An increase in key ECB rates: what are the expected effects?

An increase in key ECB rates: what are the expected effects?

During a press conference organized in Amsterdam on June 9, European Central Bank President Christine Lagarde announced a hike in key interest rates from July, and a 180-degree turn in the joint monetary policy. The only reason for this price adjustment is the noticeable rise in the prices of old containers in recent months. According to Eurostat, the European Union’s statistical office, inflation was 8.1% in May 2022 in the eurozone countries. The main component of this phenomenon is that Energy experienced an annual inflation rate of 39.2% in May.

In the face of accelerating inflation accelerated by the health situation and the war in Ukraine, the European Central Bank decided to change course to confront a phenomenon out of control. This increase in the key interest rates of the Central Bank is unprecedented since 2011. At that time, to everyone’s surprise, Mario Draghi announced a decrease in the main key rate of the institution, in order to breathe new life into family consumption. and support the recovery of economic activity. Against the backdrop of the sovereign debt crisis.

“The European Central Bank has a choice between plague and cholera”

For former Greek Finance Minister Yanis Varoufakis, the approach advocated by the European Central Bank for a gradual increase in key rates in two stages is not the right one. The European Central Bank president revealed the interest rate hike agenda, the first 0.25 point increase in July, and the second 0.5 point increase in September 2022. “The gradual increase in rates is like practicing the slow torture of a prisoner,” he said. It was reported in the Swiss daily Le Temps. The ex-minister who is now a member of the Greek parliament since the last legislative elections supports a sharp increase to 3% in rates by a Frankfurt-based institution.

For Baptiste Massenot, professor of economics at Toulouse Business School, the European Central Bank faces a dilemma between two goals defined in its basic laws: to support the recovery of timid and fragile growth in the eurozone or to maintain price stability at the expense of economic recovery. The European Central Bank sets a 2% cap on inflation. “The European Central Bank has a choice between keeping inflation high and supporting economic activity, or fighting inflation and putting growth at risk,” he said. For the economist, the solution to the equation is complex: “The European Central Bank has a choice between plague and cholera. The European economy is facing a supply shock. [diminution temporaire de l’offre des biens et services ; ndlr] He stresses that given the health situation and the war in Ukraine, the decisions of the European Central Bank will not have any impact on these economic phenomena.

This policy adopted by Christine Lagarde could weaken growth prospects in the short term, especially for households and businesses “We will see an increase in the cost of borrowing in commercial banks. It will be difficult for families to obtain a mortgage or a car loan. The construction sector has already been affected by the shortage of materials Construction, and could also slow. According to Baptiste Massenot, the expected effects of this monetary policy “will not be immediate.” Prices of daily consumer goods are very rigid, especially on the negative side. Factors such as supply conditions must also be taken into account. However, we can expect A rapid drop in the prices of some products such as hydrocarbons.”

Advertisement to break the self-sufficient inflationary spiral

For Edwin Le Heron, Professor of Economics at Sciences Po Bordeaux University, this announcement by the European Central Bank is the most “communication strategy aimed at persuading various economic agents that the central bank is acting on the issue in order to break expectations of a higher price. According to the academic Inflation is a self-sustaining process, “There is inflation when you say there is inflation. Edwin Le Heron explains: “It is an economic phenomenon fueled by the psychological effects of anticipating a price increase, in which economic agents raise their prices in order to anticipate an upcoming price increase.” In order to break this exponential dynamic, the European Central Bank “acts” with an effect declaration. “The foundation announced that it had changed its programs,” he explains. The real question to ask is: Is this economic policy credible towards customers? Are they convinced? I do not think so. The European Central Bank’s arrival with a series of delays. »

Whatever the reaction of economic players to this announcement, the expected effects will not occur immediately. “Theoretically, the monetary policy reaction time is about 18 months, and there is real inactivity,” stresses the economist, who estimates that inflation will stabilize permanently in Europe, particularly due to the explosion of commodity prices and the escalation of war. in Ukraine.

The real economic impact of higher key interest rates is greatly exaggerated according to university professor Edwin Le Heron. Household consumption should not be directly affected by this phenomenon of high prices. For years, banks have offered loan officers extremely low interest rates. These rates have reached an all-time low with an average of 1%, which is a really abnormal and unusual phenomenon,” he explains. An increase in interest rates between “2 or 3%” will not really affect borrowers with inflation around 6%, real interest rate [taux réellement perçu par les agents, un taux calculé à partir du taux d’intérêt affiché sous déduction du taux d’inflation ; ndlr] still low. Inflation never hurts the buyer but the seller. »

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