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Monday, December 4, 2023

New rise or fall in rates? ECB members in total disagreement

The European Central Bank is more divided than ever. While the ECB paused in its series of rate hikes in October after raising them from 0% in spring 2022 to 4%-4.75% in September 2023, uncertainty reigns over the future decisions of the ECB. Frankfurt Institution.

The small rating agency Scope Ratings obtains a precious sesame from the ECB

While the governor of the Bank of France affirmed on November 9 that “we are winning the battle against inflation and barring any surprises, barring any shock, the increase in our key rates is over”, the question of a future rate cut is beginning to emerge. But, this Friday,he President of the Bundesbank Joachim Nagel, wanted to calm things down.

He warned that “ it would not be wise to start cutting interest rates too soon “.

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For the German central banker, it is about being “ patient and stay the course to reap the benefits of the tightening in terms of disinflation (…) (these rates) will therefore have to remain at a high level for a sufficient period “. A clear point of view, and which could influence the future decisions of the Frankfurt Institution given that Joachim Nagel is at the head of the monetary policy of the largest European economy.

The fight against inflation not yet won

Especially since his point of view is shared by the President of the European Central Bank. The increase in prices in the euro zone stood at 2.9% year-on-year in October, almost at the target level of 2% and above all far from the peak above 10% observed at the same period last year.

However, the battle is not yet won. A good part of the significant drop in the inflation rate in recent months is linked to a decline in energy prices, which can be explained by a ” basic effect » compared to the strong increases recorded in October 2022, explained Christine Lagarde during a television interview with the Financial Times. These effects will no longer recur in the coming months, so it will be necessary to “ really watch the price of energy in the future “, she stressed. Thus, the President of the ECB Christine Lagarde estimated a week ago that a reduction in rates “ is not something that will happen in the next few quarters “.

Rates kept high borndoes not necessarily mean causing a recession »

The German banker appears this Friday as a defender of a restrictive monetary policy, because they do not fear the potential negative side effects on the economy. However, by raising rates, the ECB has seriously increased the cost of debt and slowed economic activity in the Eurozone. Joachim Nagel was nevertheless confident that having high rates, with the aim of curbing demand and calming pressure on prices, would not “ does not necessarily mean causing a recession “.

According to him, the euro zone will avoid a “ hard landing » of the economy, thanks to robust stable labor markets, favorable corporate and household debt levels and strong investment activity.

New rate increases not ruled out by some bankers

Other monetary policy makers even place themselves in direct opposition to François Villeroy de Galhau.

Austrian central banker Robert Holzmann notably said that the second quarter was simply too early for a rate cut. “ We are trying to communicate (to the markets): please don’t think this is the end of the story (about the end of rate hikes) “, Holzmann told reporters during a press briefing. Asked if he ruled out an interest rate cut in the second quarter of next year, he replied: “ It would be a little early “.

Idem, Isabel Schnabel, member of the ECB board and compatriot of Joachim Nagel, even asked last week not to “ close the door to a further rise » interest rates on the potentially unstable path to bringing inflation back to 2%. The President of the Belgian Central Bank, Pierre Wunsch, for his part affirmed that instead of relaxing its policy, the ECB should tighten it further, by ending its bond purchases sooner as part of the bond program. emergency pandemic purchase of 1.7 trillion euros.

(With agencies)