The ECB makes money up to 2% more expensive
The European Central Bank (ECB) is clear that the path to price stability goes through the rise in interest rates. This Thursday, after the meeting of its governing council, the European entity announced a new rise of 75 basis points, the third so far this year and the largest in its history together with the increase in September. This decision raises the price of money to 2% and its president, Christine Lagarde, assured that the ECB will carry out "further increases" to contain inflation, which in September set a record at 9.9% in the eurozone . It will do so despite warning signs that the European economy will cool down next year. "There may be a recession," she acknowledged.
Lagarde stressed that Thursday's decision is "a considerable advance" towards the normalization of the ECB's monetary policies. It is also one of the most aggressive increases in the history of the institution, after the increase of 50 basis points in July and the rise of 75 basis points in September. All in all, Lagarde pointed out that "she plans to continue increasing rates" to ensure that inflation is contained below 2% in the medium term. The increase in prices has become the main headache for this organization since the beginning of the invasion in Ukraine, which has triggered the cost of energy and food.
"We are surprised by the unprecedented rise in prices in such a short period of time," Lagarde said. The ECB has reacted accordingly, but according to its latest forecasts, inflation will remain high "for a long period of time", weighing down consumption and the consumption and production of European countries. Analyzing these data, the European bank stressed that "there is still ground" in the field of interest rate increases. In any case, these will be decisions that will be taken "meeting by meeting", due to the current high level of uncertainty. The gas supply cutoff by Russia and the possibility of a long war in Ukraine remain the two main risks for the European economy.
"Not the worst case scenario"
Despite the indicators that draw a "somewhat pessimistic" future, Lagarde stressed that "we are not in the worst possible scenario." There are reasons for optimism: the labor market remains strong -with unemployment at a historical low of 6.6- and the reduction in consumption could reduce inflationary pressure. The ECB is also no stranger to analyzes that predict a cooling of the economy due to rate hikes: "It is something that worries us, especially in the face of the situation of the most vulnerable," Lagarde stressed. In fact, the first signs that economic activity is slowing down are already being observed, a trend that will also continue in 2023. The agency, however, "is focused" on fighting inflation and considers that reducing it "is the way to go." most appropriate to restore stability and prosperity' in the eurozone.
Meanwhile, the institution will continue to reinvest the principal of the securities acquired through its asset purchase program that mature "as long as necessary" to maintain conditions of "ample liquidity." The same will happen with the assets of the emergency purchase program launched during the pandemic, to which “flexibility” will be applied to counteract the risks of the transmission of monetary policy.
Lagarde pointed out that she hopes that European countries continue on the path of reducing public debt and that they implement important reforms under the umbrella of the Next Generation funds. The body he chairs will also remain vigilant to avoid any risk of fragmentation in the euro zone economy.