The ECB undertakes the ninth rate hike in a year to 4.25% and takes them to the maximum of 2008

With a message that has been telegraphed since the last meeting last June, the European Central Bank (ECB) has remained faithful to its commitment and has just announced the ninth consecutive rise in interest rates in the euro zone in the last year, in what has already become the longest and most powerful cycle of increases since the institution existed. Thus, the agency will lead the refinancing rate to levels of 4.25%, not seen since 2008 and which, therefore, equal the maximum that have occurred since prior to the financial crisis.. In the same way, the ECB has also decided to increase the deposit rate to 3.75% and the marginal credit facility to 4.5%.. In conclusion, it once again increases the three main reference rates in the Eurozone that will come into force on August 2.

The meeting held today within the institution in Frankfurt raised few questions among the members of the market, so all attention will be focused on the speech that its president, Christine Lagarde, will deliver this afternoon, to find out if it gives clues about what can happen at the next summit in September after the summer break. In the argument published by the organization, the Central Bank insists that “inflation continues to fall, but we still expect it to remain too high for too long”, a phrase repeated in recent public appearances and that would leave the door open for a new rise. at the September meeting, about which there is no certainty in the market. In this sense, he acknowledges that “the Governing Council will continue to look at the economic data” to adopt a future decision after the summer, although he once again stressed that the rates will remain “at sufficiently restrictive levels for as long as it is necessary to achieve a return of inflation to the medium-term objective of 2%”.

In recent weeks, the truth is that there has been a change in discourse among some of the main hawks that make up the ECB, and they are those who have always been more inclined to tighten monetary policy. This is the case of Germany. Bundesbank president Joachim Nagel seems to have become, as Lagarde likes to be, data dependent, which means simply waiting and seeing how the data evolves.. Perhaps it is because your country, in a technical recession, cannot control the escalation of prices, as others such as Spain and Belgium are doing, where the latest CPI data falls to levels of 2%, which is the mandate and historical objective of the ECB. “Spain has demonstrated the heterogeneity that we have in the Eurozone. Inflation in Spain at levels of 2%, in addition to low unemployment rates, is not a situation that is repeated in the rest of the member states. There are countries where inflation is expected to remain high for longer and that is why we must look [separately] at the characteristics of each of them,” Christine Lagarde responded to questions from journalists during the press conference this Thursday in Frankfurt.

In the case of the German economy, prices in June rose from 6.3% to 6.8%. In Spain last month the CPI fell to 1.9%, while core inflation (that which excludes fuel, energy and the price of fresh food, and which is what really worries the institutions) stood at 5.9%, two tenths below May. In the Eurozone, the balance for June was a fall in prices to 5.5% compared to the previous figure of 6.1%. “Core inflation is showing its downward resistance (since it is still very close to the peak of 5.7% in March) and the ECB's own projections do not see levels close to 2% until 2025 after revising them sharply upwards in June”, they say from Renta 4. These latest updated projections point to a CPI at levels of 5.4% in December, 3% in 2024 and that it will fall to rates of 2.2% in 2025.. As for the underlying rate, this year, according to these same estimates, it would stand at 5.1% and then be controlled to 3% and 2.3% in two years.

Another hawk who has spoken out these days is Klass Knot, president of the Central Bank of the Netherlands, who, although he considers that the rate hike announced today was “a necessity”, talking about new increases in September would not be “in any way way a certainty” but simply a possibility, he pointed out in statements to Bloomberg TV last week. A step back from his most hawkish speech.

MORE RISES IN SEPTEMBER?

Christine Lagarde wanted to leave black on white that the ECB has not made a decision on whether or not to raise rates again at the September meeting. The door is open. During the press appearance and questioned to the point of exhaustion by the journalists in search of greater clarity, Lagarde herself wanted to emphasize that the fact that only one expression has changed in her speech is not trivial. And it is true. The Central Bank has gone from speaking euphemistically of “having much more ground to cover” to affirming that it will be “the data that will tell us when and how much more ground we must cover in September and in subsequent meetings”. In short, “it can vary from one month to another. We can go up types or no. We will analyze the data” that will yield two new CPI readings for after the summer and the institution will also have a better understanding of how monetary policy is being transmitted to the real economy. “The only thing I can assure you is that we are not going to lower them. That's a definite no,” but whether or not to upload them “will vary from meeting to meeting.”. “We cannot claim victory yet,” said the head of the ECB.

“We will be in the hands of the data and the assessment” made of them, Lagarde asserted. To date, what the ECB does recognize is that “a strong transmission to the economy is really being seen” of the new monetary policy, in regard to the collapse in demand for credit by companies and families. On the other hand, the agency continues to be concerned about salary inflation and the profit margins of companies, which continue to push prices up.. “The rise in wages is playing an increasing role in inflation”.

The fall in mortgages is accelerating in the Eurozone, but the ECB says it is not concerned about residential “where we are seeing a slowdown in price rises but not a fall”, despite the situation in Germany, but It does look “more carefully” at real estate linked to shops, whose “prices had already begun to fall before the rate hike began,” says the vice president of the ECB, Luis de Guindos, as a result of the crisis of the malls ( malls) that originated in the US more than five years ago due to the irruption of Internet commerce.

WHAT THE MARKET EXPECTS

There is some optimism (very prudent, yes) among the members of the Central Bank who expect a certain “stabilization of inflation”, as highlighted by Ibercaja, which observes a certain change in trend. The key is undoubtedly trying to guess what will happen in September because the ECB faces several important challenges: on the one hand, the euro zone has once again reflected two speeds and, on this occasion, Spain is escaping from the group of lagging behind, with a CPI in the process of being controlled and better growth projections for this year. The last to speak out was the International Monetary Fund (IMF) this week, which raised the growth forecast from 1.5% to 2.5% of GDP, while keeping the estimate intact at 1.5%. by 2024.

“For September, we believe that these figures will justify the end of the cycle of increases and that they will remain on hold until rates begin to fall, which, at the earliest, we expect to happen by the end of 2024,” the Nomura bank analysts point out.

During the last public appearance in Frankfurt in June, Christine Lagarde wanted to underline her concern about the increase in wages in the Eurozone, since they generate inflationary pressure that the institution is not knowing how to manage. Gone are both the escalation in energy prices due to the war taking place in Ukraine and the rise in the prices of the shopping basket, which the ECB considers controlled. “In a context in which companies continue to benefit from pricing power and in which low unemployment not only supports demand resilience, but also fuels wage demands, the risk that the core inflation remains high, especially if one takes into account that the mix of fiscal and monetary policies is not restrictive enough,” say the experts at Allianz Global Investors.

With background dynamics such as the good unemployment data in the Eurozone, at historical lows of 6.5%, which is maintained, the Central Bank must justify its next movements. For now, the data reflects a collapse in loan requests in the euro zone, which in the case of companies has fallen to all-time lows, and a certain upturn in delinquency is also observed. It should not be forgotten that while the ECB is achieving its goal of slowing down the economy, the most vulnerable families, with soaring mortgage payments, run the risk of turning a temporary stoppage into something chronic.