European Central Bank Headquarters – Frankfurt
There is uncertainty about the ECB’s future direction on interest rates after this summer, given a series of conflicting indicators recently released by ECB officials and diverging estimates of underlying economic data in Europe. The period ahead and its implications for the economic situation in Europe.
According to the Financial Times, ECB policymakers were divided on how long after the next policy meeting they would need to keep raising rates in response to high inflation, with the most prominent comments underscoring this division:
* Bundesbank President Joachim Nagel: Even if rate-setters raise deposit rates by a quarter, there is still “a long way to go” to reach the central bank’s 2% inflation target. Therefore, “we may need to continue to raise interest rates after the summer vacation.”
* Bank of France Governor François Villeroy de Gallo pushes back against increasingly hawkish trends, while other Governing Council members agree that official borrowing costs may need to continue rising beyond September .
* Villeroy: “No one should rush to premature conclusions about our calendar or our final interest rates…we are data-driven, not expectations-driven”, pointing to signs that eurozone inflation may have peaked and “put pressure on core interest rates to fall” as evidence that the ECB’s recent tightening policy is working.
* Belgian Central Bank Governor Pierre Wench: If core inflation, which excludes volatile energy and food prices, continues to rise at an annual rate of around 5%, we will raise rates after September.
Slovenian Central Bank Governor Bostjan Vasli: A September rate hike is possible “if inflation is more stable than it currently looks”.
The International Monetary Fund earlier warned of “persistently high” inflation in the euro zone and called for further rate hikes, which it said were necessary in a “sustainable period”.
Members of the euro zone should also rein in budget deficits, the International Monetary Fund said in a report on the euro zone economy.
obstacles to growth
In a statement exclusively to Sky News Arab Economics, Tariq Al-Rifai, chief executive of the Corum Center in London, said there was internal disinclination within the ECB to continue raising rates given the problems facing the economy. disagreement. growth in the region. , especially in recessionary Germany.
He explained that “very slow” economic growth in France and other European countries has cast a shadow over subsequent fiscal and monetary policy, so the policy adopted by the ECB has diverged.
Al-Rifai noted that the debate was on whether the ECB would keep raising rates despite slowing growth, taking into account high inflation, which remains high at 6 percent for the bloc.
While inflation in the euro zone has fallen to 6.1 percent in May from a peak of 10.6 percent in October last year, it remains well above the central bank’s 2 percent target.
Officials expect the closely watched core inflation rate to remain above 2% until at least 2025, according to new quarterly forecasts from the ECB. The core rate was 5.3% in May.
The grim outlook has prompted economists at several major banks including Goldman Sachs, JPMorgan and BNP Paribas to change bets on how euro zone interest rates will rise. They now expect two more rate hikes, higher than previous expectations that the central bank would halt its tightening cycle in July.
The Financial Times reported that Sven Gary Steen, chief European economist at Goldman Sachs, was quoted as saying: “The latest inflation forecasts point to greater hurdles to ending the July picnic cycle.”
The report also quoted Holger Schmieding, chief economist at Berenberg Bank, as saying, “If core inflation continues to slow slightly in the coming months – as we expect – and if real economic data More in line with our call for growth” With interest rates at just 0.3% in 2023, the ECB is likely to keep rates on hold in September. “
Inflation rate
Amy Verdon, founding director of the European Studies Program at Victoria University, said in an exclusive statement to Sky News Arab Economy:
– On June 15, 2023, the European Central Bank will increase the three main interest rates by 25 basis points (ie 0.25%).
Most market watchers expect a similar increase in July.
– No decision will be made in August, but the board’s next decision will be in September, and it’s unclear what that decision will be.
Verdon pointed out that the ECB’s top priority is to maintain price stability, which is defined as inflation at 2% in the medium term, and the ECB will decide whether it can achieve this goal based on available data.
She added: “September is still far away, so the Governing Council will look at the data before deciding whether inflation will fall. Currently, based on June figures, the ECB expects headline inflation to be 5.4% in 2023, 3.0% in 2024 and 2.2% in 2025. If there is a risk of inflation continuing for a longer period of time, the ECB still needs to raise interest rates further if inflation expectations are not enough.
“The ECB’s legitimacy and credibility are based on its mandate, and if it fails to maintain price stability, it risks losing legitimacy and credibility,” explained the founding director of the ECB’s European Research Programme. Victoria emphasized, “Inflation is a problem that has to be addressed and the EU legal system that the ECB needs to do the job is in place.”
She said the reason for the discussions within the ECB’s Governing Council was that further rate hikes, especially if other central banks delay further hikes, could lead to a further slowdown in the economy. Inflation in Germany, the EU’s largest economy, has already begun to decline.
At the same time, she pointed to the plight of declining economic activity in Europe, explaining that if interest rates are too high, it could push the economy further into recession or last longer. There is also a risk that if inflation remains high for an extended period, consumers will spend a greater proportion of their income on mortgage payments when renewing their mortgage rates for a given period. Workers will also demand higher wages, which in turn may make it harder for inflation to return to 2% in the medium term. It is therefore also important that the central bank continues to signal its willingness to raise rates further if necessary.
“It’s unclear whether this means the central bank will need to raise rates further in September, or if it will pause for now,” she concluded.
Earlier this month, both the Federal Reserve and the Bank of Japan decided not to raise rates, but the Bank of Canada did. As a result, the ECB and the US have diverged this month. However, if inflation persists and the data differs from expectations, further tightening in September may be required, Verdon said.