Correlation of the ECB’s new policy with inflation – Will the decline in prices take time – Who benefits and who is at risk
Since May it has been clear that the European Central Bank (ECB) will renounce the policy of low to negative interest rates that it has consistently implemented for the past eleven years. Most analysts had expected a first rise of twenty-five basis points in July. But the guardians of monetary stability in Frankfurt chose a more “aggressive” tactic on Thursday as well ECB chief Christine Lagarde announced the historic decision to increase key interest rates by fifty basis points (0.50%). This means that the “negative” or “punitive” interest rate is a thing of the past and indeed from now and not from September, as Christine Lagarde’s statements previously implied.
His satisfaction with the ECB’s decisions is expressed by Michael Hitter, director of the Institute of German Economics in Cologne (IW), speaking to Deutsche Welle. “Surely this decision comes a bit late, in the last year nothing justified negative interest rates,” says the German economist. “What we are seeing now is certainly a bold step, a step that goes further than expected. But it is also ‘front loading’ in nature, meaning that a future decision to raise interest rates again will be limited to 0.25%. However, it is now clear to everyone that the ECB is focusing on inflation.”
It will take a while for prices to come down
In the last eleven years, the main objective of the ECB has been to maintain the cohesion of the eurozone, but also to indirectly support highly indebted countries, such as Italy and Greece, in an environment of low interest rates and “cheap money”, which, however, had significant costs for depositors . Today the ECB is mainly focusing on fighting inflation, which is apparently not as “temporary” as Christine Lagarde estimated months ago. Frankfurt’s declared target is an inflation rate of around 2%, while today inflation in the eurozone has soared to 8.6%. Michael Hiter himself estimates that the medium-term target is around 1.5%, and the ECB will seek to approach it in cautious steps of around 0.25% each time.
But the ECB’s intervention does not mean that prices are going to fall within days, warns Michael Hitter. “Inflation is mainly imported, it is largely due to energy prices in the international markets” points out the director of the Institute of German Economics (IW). “It is not something that the ECB can easily fight, let’s not expect an immediate drop in prices. What we can expect is a normalization in some markets, for example in oil or grains and from there will come a relief in the future. But for now it is clear that inflation remains above the ECB’s target.”
“The benefit outweighs the risks”
Depositors are expected to benefit immediately, at least in Germany. Most banks have announced their decision to eliminate “guardian” or other related charges they imposed on their customers due to negative interest rates, with the aim of attracting new deposits. Already today, anyone who places their money in a term deposit can secure an interest rate of around 0.6%. Of course the “real interest rate” (nominal interest rate minus inflation) remains negative.
In the field of macroeconomics, many express concerns that a sharp “take-off” of interest rates could stifle even timid attempts at recovery after the shock of the pandemic and the war in Ukraine. The specter of stagflation lurks. However, Ulrich Kater, chief economist at DekaBank, believes that the ECB essentially had no other choice. “There is nothing more dangerous for an economy than the consolidation of inflation at high levels,” the German economist states on German television (ARD). “Look for example what is happening in Turkey. Any side effects to the recovery therefore pale in comparison to the greater benefit for all, which is taming inflation.”
DW
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