To counter inflation, Christine Lagarde (ECB) triggers a rate hike

Christine Lagarde prévoit de remonter les taux de la BCE au début du troisième trimestre

[Article mis à jour le 11 mai à 12h25]

This is a first for ten years. Reluctant until now to tighten its monetary policy as several central banks were beginning to do, the ECB is starting to raise interest rates in the euro zone. The normalization of European monetary policy could take place at the beginning of the third quarter, announced the President of the European Central Bank, Christine Lagarde, by ending her asset purchase program (APP) followed “a few weeks” a rate hike later.

“My expectation is that they [les achats d’obligations] should be completed by the beginning of the third quarter”declared Christine Lagarde during a conference in Slovenia. “The first rate hike (…) will take place some time after the end of the net asset purchases (…), which may mean a period of only a few weeks”she added.

Fight against inflation

This announcement confirms market expectations, which foresaw a rise in interest rates in July in order to curb the rise in consumer prices. Most of the other major central banks have already raised their rates, but the more wait-and-see ECB continues to inject liquidity into the financial system through bond purchases on the markets. The Fed thus raised its key rates by half a percentage point in early May, the first increase of this magnitude since 2000 in the hope of reducing its inflation, which reached 8.5% over one year. The Central Bank of England (BoE), for its part, raised its interest rate Thursday to 1%, its highest level since 2009 for the same purpose.

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In Europe, several factors have led to the current inflationary context, such as the strength of the economic recovery last year with the improvement of the health situation, the war in Ukraine and the acceleration of the rise in energy prices and of the fuel that accompanied it, the breaks in the supply chain which were accentuated with the conflict… Although inflation remains more moderate than across the Atlantic, it nevertheless reached 7.5 in the euro zone. % over one year last month, far from the target of 2% set by the central bank. What justify a rise in rates in July as a growing number of members of the Governing Council of the ECB have called for in recent months.

“What started as a one-off shock has now become a larger phenomenon”said Bostjan Vasle, the Governor of the Bank of Slovenia.

“When circumstances change, the political response must follow,” he added.

His counterpart at the Bundesbank, Joachim Nagel, and Frank Elderson, a member of the board of the executive board of the ECB, also advocated on Wednesday a rate hike in July. At the end of April, several sources, quoted by Reuters, anticipated at least two rate hikes this year and some even thought that a third could intervene before December 31st.

According to Estonian Governor Madis Müller, the ECB’s deposit rate, currently -0.5%, could turn positive again by the end of the year, which has not happened since 2014.

“Even if we do 25 basis point rate hikes, we could get to a positive rate by the end of the year”he said in an interview with Reuters.

Reduce public debt

But this policy will not be without consequences and will have to be accompanied by an effort to reduce the public debt, warned François Villeroy de Galhau who deplores that too many French people consider that the debt “would have become limitless and costless”.

According to the central banker, who was anticipating a rate hike from the summer, they “will rise but very gradually (…), but the European Central Bank and the Banque de France will do what is necessary (…) to bring inflation back to around 2% in the next two years”.

“It is therefore all the more important for the budgetary authorities to ensure debt sustainability in the context of rising rates”added the one who is also a member of the ECB.

According to the Banque de France, each 1% increase in interest rates represents an additional cost of nearly 40 billion euros per year after ten years, which is almost equivalent to the current defense budget.

Alerting on the financial situation of France last January already, François Villeroy de Galhau advanced certain tracks to try to contain the public debt. He “it is not a question of reducing public spending overall, but of tending towards their stabilization” by limiting their growth in volume to 0.5% per year, against more than 1% observed during the previous decade, “at constant mandatory deduction rates”, he explained. While they represented 55.4% of GDP in 2019, the level of public expenditure reached 61.4% in 2020, down to 59.2% in 2021, according to INSEE.

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As for the cancellation of the debt, the governor brushes aside “this monetary miracle” : “Some make believe that the cancellation of the debt held by the Banque de France and the Eurosystem would be a solution. It is not so. A debt cannot be canceled; it can be refinanced at maturity, but this is not the case. is never automatic. And the lender will only refinance if he has confidence in the sustainability of this debt. A lender, private or public, who is not repaid, will no longer lend“,