A year after launching the fastest rate hike cycle in their history, the guardians of the euro are staying the course. The European Central Bank (ECB) on Thursday (July 27th) announced to raise its benchmark interest rate once again, while leaving uncertainty for the future, as the effect of monetary tightening is felt on the economy .
The 0.25 percentage point rate increase decided on Thursday, as in June, brings the bank liquidity deposit rate to the ECB, which refers, to 3.75%, the highest since the spring of 2001.
After nine successive interest rate hikes, he hinted that he might take a break at the next meeting. “We have an open attitude regarding the decisions that will be taken in September and at subsequent meetings,” which will depend on the available economic data, ECB President Christine Lagarde told a press conference in Frankfurt.
“We are moving into a period where we will be dependent on economic data,” she added, and it is this that will decide “whether we raise [rates] or take a break,” Lagarde explained. “It could be an increase, or a break,” she added, “it will depend on the meetings.” She assured that the Board of Governors in any case would not lower its rates in future meetings.
In the euro zone, inflation is certainly down, at 5.5% over one year in June, but above all thanks to the decline in energy prices, and by remaining well above the 2% target set. by the ECB.
The open door to a break comes as previous increases are starting to slow price increases and weigh on economic activity. Ms Lagarde said the economic outlook for the eurozone had “deteriorated”. The policy of high rates is “risky” and could “prolong the phase of economic weakness in Europe and Germany that we are currently experiencing”, the president of the Berlin institute DIW Marcel Fratzscher told a German media group on Thursday.
In the United States, the Federal Reserve showed the way on Wednesday by deciding to raise its key interest rate again, by a quarter point to 5.5%, the eleventh since March 2022. The rate is at its highest since 2001. In the euro zone, the effects of the cumulative rise in interest rates are already perceptible: demand for credit, particularly from companies, fell to its lowest level in 20 years during the second quarter, the ECB indicated on Tuesday .
The euro zone fell into a mild recession last winter, but the latest forecasts from the International Monetary Fund see the region’s GDP (gross domestic product) growing by 0.9% (0.1 points) in 2023, despite a decline in Germany (-0.3%), the only G7 country that should see the recession persist.
The ECB wants to slow down the economy so that companies and businesses give up raising prices, and that their employees moderate wage demands, which tend to fuel inflation. Ahead of today’s monetary policy meeting, the ECB’s restrictive course was criticized in some fragile European economies.
This policy could create “a more difficult situation for growth at European level”, Portugal’s Finance Minister Fernando Medina said in mid-July. Italian Prime Minister Giorgia Meloni criticized the “simplistic recipe” of raising interest rates to fight inflation in late June, fearing that “the cure will prove more damaging than the disease”.
