The ECB as expected: “Inflation too high”. Rates up by 0.25%. Salvini attacks: “It damages businesses and families”

The ECB proceeds as expected with the eighth consecutive rise in interest rates, by 25 basis points as occurred in the last meeting.

The rate on deposits with the Central Bank thus rises to the highest levels since July 2001, with 3.5%, and those on the main and marginal refinancing operations to 4 and 4.25% respectively. Right from the opening words of its press release, the ECB explains its reasons: “Inflation has decreased but should remain too high for too long a period of time. The Governing Council is determined to ensure the timely return of inflation to the target by 2% in the medium term. It therefore decided today to raise the three key ECB interest rates by 25 basis points”.

The move comes in the aftermath of the choice made by the Fed, which, as expected, took a “pause” in the path of rate hikes but opened the door to new moves during the summer meetings: the expectation is for two more steps from here to the end of the year.

Estimates on inflation and growth

The Eurosystem therefore updated its macro estimates to forecast inflation at 5.4% in 2023, 3.0% in 2024 and 2.2% in 2025. “Indicators of underlying price pressures remain elevated, although some of them are showing tentative signs of easing.Experts have revised upwards their projections for inflation excluding energy and food, in particular for this year and next, due to past unexpected increases and of the implications of the strength of the labor market for the pace of disinflation. In 2023 it would therefore stand at 5.1%, before decreasing to 3.0% in 2024 and 2.3% in 2025”. Opposite revision, however, for growth which is expected to be 0.9% in 2023, 1.5% in 2024 and 1.6% in 2025.

The attention of insiders is now focused on the words of Christine Lagarde, ECB president, who will explain how far the Eurtower still has to go in terms of further rate hikes, to quote the words of Pictet’s head of economic research, Frederik Ducrozet. “The ECB has made it unequivocal that future decisions will depend more on data as rates are nearing their peak. In particular, today’s statements are likely to reiterate that ‘the effects of previous rate hikes are still being broadcast on the financial and monetary conditions of the Eurozone,'” he wrote in a note on the eve of the meeting.

Salvini’s lunge

The deputy prime minister expressed his opinion on Frankfurt’s monetary policies from the assembly of the Concooperative Matthew Salvini. He shot zero on Lagarde: “The ECB realizes that with its interest rate policy it reduces inflation by zero point but damages families and businesses. I would like economic and infrastructure policy to not only follow the algorithms in the bank and to the ministry”.

The reasons of the ECB

On the other hand, it is the ECB’s statement itself that explains the reasons for the action on rates. What has been done so far is “transferring strongly to financing conditions” and is “gradually affecting the whole economy. Borrowing costs have risen sharply and loan growth is declining. Tighter financing conditions are a key reason for the which inflation is expected to decline further towards the target, as these are increasingly expected to dampen demand”. As for the future, the ECB reiterates that it will maintain sufficiently restrictive conditions to bring prices back to +2% and that its approach will be guided by data.

Among other announcements, also the expected confirmation of the stop “to reinvestments under the asset purchase program starting from July 2023”. As regards the PEPP, the program launched during the pandemic, “the Governing Council intends to reinvest principal payments on maturing securities under the program until at least the end of 2024. In any case, the future phasing out of the PEPP portfolio be managed so as to avoid interference with the appropriate monetary policy stance.The Governing Council will continue to flexibly reinvest the principal payments from maturing securities of the PEPP portfolio, to counter the risks to the monetary policy transmission mechanism attributable to the pandemic”.

The ECB concludes its statement by recalling that it is ready “to adjust all its instruments within the scope of its mandate to ensure that inflation returns to the 2% objective in the medium term and to preserve the orderly functioning of the transmission mechanism of monetary policy”. And recalling that the instrument for protecting the transmission mechanism of monetary policy (the anti-spread shield) “can be used to counter unjustified, disorderly market dynamics that seriously jeopardize the transmission of monetary policy in all euro area countries euro, thereby enabling the Governing Council to fulfill its price stability mandate more effectively”.