analysis
In view of stubborn inflation, the ECB has increased key interest rates again by 0.25 percentage points. But so far their monetary policy has had little effect: inflation will remain high for this year and next.
The sky is blue, the sun is shining and the temperatures are pleasantly late summer. But there was no great joy among the European Central Bank’s monetary authorities in Frankfurt am Main today. The central bank’s latest inflation forecast is anything but encouraging: Inflation expectations for this year have been raised from 5.4 to 5.6 percent, and inflation expectations are also expected to be higher at 3.2 instead of 3.0 percent for the coming year.
And even for 2025, the two percent target will only be achieved with a lot of effort – then the annual inflation rate should be 2.1 percent. “Inflation has been far too high for far too long,” said ECB President Christine Lagarde, commenting on the developments. High energy and food prices in particular would continue to drive up inflation and keep it at a high level, she explained the forecast.
But even if you take these two factors out, because the ECB can’t do anything about them anyway, things don’t look much better. The so-called core inflation is also expected to be 5.1 percent this year, fall to 2.9 percent next year and be 2.2 percent in 2025 – all far too high.
Tenth increase in a row
In view of these expectations, the ECB had no choice today but to up the ante: for the tenth time, the central bank raised the three key interest rates by 0.25 percentage points each. The main key interest rate is now 4.5 percent. This is a record in the history of the monetary union.
However, there was a heated debate over the decision. Many council members had called for a pause on interest rates and wanted to wait for further data. But a majority ultimately decided in favor of the interest rate hike.
When the inflation rates were published in August, it became clear that inflation was proving to be much more stubborn and unruly than hoped. In many countries, including France and Austria, inflation rose again, in some cases significantly. Even in Spain, where the two percent mark was temporarily fallen below, everything is becoming more expensive again. The latest data shows “how stubborn the beast inflation is,” Bundesbank President Joachim Nagel recently told the “Handelsblatt”.
Did the ECB hesitate for too long?
This is not good news for the approximately 340 million people in the eurozone. Because Lagarde’s promise that we will “break the neck” of inflation is still a long time coming and does not appear to be in sight. Many experts accuse the ECB of not only reacting too late to current developments, but also of underestimating the new quality of inflation.
The high military spending due to the war in Ukraine, the energy transition and the transformation of the economy are pumping a lot of money into the circulation, which is permanently driving up inflation. De-globalization also has a similar effect: Because of limited competition, many companies are able to achieve significantly higher prices. According to its critics, all of this is not being perceived correctly by the ECB. They assume that a return to the two percent target is illusory.
High interest rates for as long as necessary
But Christine Lagarde wants to stick to it and emphasized at the press conference that everything will be done to achieve this goal. The high interest rates would make a substantial contribution to this. The key interest rates will be kept at a restrictive level for as long as necessary.
Some observers concluded from these statements that the ECB had now reached the interest rate peak and would take a break at the upcoming meeting in October. But when asked, Lagarde did not want to confirm this: “I’m not saying that we have now reached the peak,” said the president. In doing so, it once again left open how the ECB will continue to act. The new data in October are decisive.
However, the statements were interpreted differently on the financial markets. The German stock index turned significantly positive after the statements.