the markets anticipate a blow of monetary mass

the markets anticipate a blow of monetary mass

The ECB wants to strike hard to fight against the rise in prices unprecedented for almost half a century and bring it as quickly as possible to a neutral rate, around 2%, which neither stimulates nor slows down the economy. After having raised its interest rates in July for the first time in ten years – by 50 basis points – the European Central Bank will raise them again on Thursday 7 September. An increase whose magnitude could be unprecedented if the worst scenario materializes. Two options are in fact being considered: an increase of 50 basis points or 75 basis points in the bank deposit rate with the ECB, reduced this summer to zero after eight years of negative rates

An increase of 0.75 basis point would be unprecedented

An increase of 75 basis points would be unprecedented. But it is this scenario that is expected by the markets. All the more so with the weakness of the euro, which sank below the threshold of 0.99 dollars on Monday. However, a weak euro increases the cost of imported products, which fuels inflation.

“We are forecasting a rate hike of 75 basis points”, explains to AFP Franck Dixmier, director of bond management at Allianz Global Investors, illustrating the shift in the consensus of observers who initially expected a rise of 50 basis points. key rates. Indeed, such an increase would be a first for the monetary institute, in two decades of existence.

In July, the ECB hit hard by surprisingly announcing an increase of 50 basis points, when 25 points were expected.

“We think it’s a hair’s breadth (between assumptions, editor’s note), with good arguments on both sides, but at the end of the day we think those advocating a bigger hike will win, when September represents the best opportunity to send a clear signal of determination,” Jens Eisenschmidt, an economist at Morgan Stanley, told Reuters.

“Whether it’s 50 or 75 basis points (…), we see the cycle of ECB hikes ending at 2% in March,” he added.

The risk of recession

In July, the ECB indicated that it would raise rates by 50 basis points in September if inflationary pressures abated. However, prices rose in August by 9.1% over one year in the euro zone, unheard of since the creation of the common currency. And the pressure on prices should not ease, on the contrary, with the winter with the new tensions in energy prices since the complete cessation of the delivery of Russian gas to Europe. Some are even predicting double-digit inflation in the fall.

Inflation or recession

The ECB’s decision comes with a political dilemma. With soaring energy prices, purchasing power is at half mast and the risk of recession in the European Union is increasing, European Commissioner for the Economy Paolo Gentiloni said on Wednesday. And this recession could be amplified by aggressive measures by the ECB, especially with rising borrowing costs for governments even as they try to provide aid to those most affected by the crisis.

Within the ECB, several members are in favor of a less marked increase. In particular the chief economist Philip Lane. But the clan of “gradualism” is “minority”, assures Bruno Cavalier, economist at Oddo. Also, the only possible way is that of “determination” in the face of unbridled prices and this “even at the risk of weaker growth and higher unemployment”, hammered at the end of August Isabel Schnabel, influential member of the executive board. of the ECB. If a central bank is slow to adapt its policy, “the costs can be considerable,” she argues.

In the event of a timid measure, fears of inflation that would last could be reinforced, and the credibility of the ECB in its anti-inflation role, tarnished. In this scenario, the euro would find itself weakened against the dollar, while the US Federal Reserve (Fed) acts more aggressively. US Federal Reserve rates are between 2.25 and 2.50% and a 75 basis point hike is looming on September 21st.

Why the ECB has every interest in accelerating the rate hike