ECB, here is the rate increase: +25 points. So Frankfurt slows down the pace of the squeeze

The European Central Bank chooses to keep the bar straight and launches the seventh interest rate hike in a row. Plus 25 basis points, a compromise compared to the request of the Northern front, which asked for another half percentage point. On the other hand, it will be possible that the increases go beyond June. Core inflation, excluding energy and food, remains too high according to the Governing Council. And the flashback of the general index, which rose in April, is viewed with fear by Frankfurt. The priority was and remains price stability. At least for now, therefore, no pause for reflection as announced yesterday by the Federal Reserve.

Christine Lagarde has repeated this often in recent weeks. Between price stability and financial stability, better to preserve the former. Especially because the situation of European banks is much more solid and robust than those of small and medium-sized American banks. Today’s priority is price increases. “The outlook for inflation continues to be too high for too long,” explains the ECB in its commentary statement on the decision. In light of continued high inflationary pressures, the Governing Council decided today to raise the three key ECB interest rates by 25 basis points. Overall, the incoming information broadly supports the assessment of the medium-term inflation outlook that the Governing Council formed at its previous meeting. Headline inflation has declined in recent months, it notes, but “underlying price pressures remain strong.” At the same time, “past rate hikes are forcefully transmitted to the financial and monetary conditions of the euro area, while the lags and strength of the transmission to the real economy remain uncertain”. It follows, notes Frankfurt, that “future decisions of the Governing Council will ensure that official rates are brought to sufficiently restrictive levels to achieve a timely return of inflation to the medium-term objective of 2% and will be maintained at these levels for as long as necessary.” In other words, there will be new increases, perhaps more gradual, and still determined by data analysis.

What is certain is Lagarde’s mantra, which becomes double. On the one hand, the will to keep the bar straight against inflation is reaffirmed. On the other, the need to monitor the situation on the financial markets in view of any tensions. The Governing Council is ready to adjust all its instruments within the scope of its mandate to ensure that inflation returns to its 2% target over the medium term and to preserve the smooth functioning of the monetary policy transmission. ». At the same time, however, “the ECB’s toolkit is fully equipped to provide liquidity support to the euro area financial system, if needed”. Furthermore, «the transmission protection instrument (the ITP) is available to counteract unwarranted and disorderly market dynamics that pose a serious threat to the transmission of monetary policy in all euro area countries, thereby enabling the Governing Council to fulfill its price stability mandate more effectively. That is to say, there is more than one arrow to shoot in the Frankfurt quiver. And that the priority now is to fight inflation. Especially in light of the summer, which could increase price pressures.

The next appointment will be that of the mid-June meeting, in which there will be a general verification of the path undertaken in July 2022. The members of the Governing Council will take stock of three aspects in particular: the correct functioning of the monetary policy transmission channels, inflation expectations, financial stability. Based on the results, they will decide the next moves. But further elements could come from the Sintra Forum, scheduled for the last week of June. Last year was a crucial summit to define the strategy to combat inflation. This year could be instrumental in figuring out how to navigate so much uncertainty.