The ECB brings rates to the top (4.50%) but the end is in sight


By John

Inflation is still scary the ECB raises rates by another 25 basis points, pushing the main rate to a historic record of 4.50%. But, for the first time in ten months, the Governing Council signals that we may have reached the maximum, the so-called peak of rates. It is not a certainty that closes the door to new increases, but it is the conclusion that, for now, the euro governors have reached by analyzing the latest data on the economy, which is slowing down but without signs of recession, and the inflation that increases. Next month the data could change, and consequently so could their decision. To announce the new increase in the reference rates which brings the rate on deposits to 4% and that on marginal loans to 4.75%, the Central Bank uses the usual formula: “Inflation continues to decrease, but it is still expected that remains too high for too long a period of time.”

It is mainly due to energy prices, which rose again in August and also forced the estimates published in June to be revised upwards.. Inflation will rise to 5.6% in 2023 (instead of 5.4%), to 3.2% in 2024 (instead of 3%) and to 2.1% in 2025. The latter figure, the the only one of the three-year period revised downwards, it is the only one that gives hope for the goodness of the horse treatment that the ECB is administering to the euro zone, attracting criticism from various governments, including the Italian one. The new decision “I don’t think it can help Europe’s economic recovery, which is the main problem we have”, said the Minister of Business and Made in Italy, Adolfo Urso, remembering that Germany is already in recession and the Netherlands is headed down the same path. Criticism comes from the majority parties and, among others, from the economic manager of the league, Alberto Bagnai, from the president of the senators of Forza Italia, Licia Ronzulli and from the vice president of the Chamber (Fdi), Fabio Rampelli. The president of the Abi throws water on the fire, Antonio Patuelli which speaks of a ‘new normal’: “even with today’s rise by the ECB – he states – the rate remains one of the lowest in the history of Italy” which has seen up to “19.5% of the discount rate”. The Central Bank is aware that the economy is slowing down, so much so that it has had to “significantly” cut its growth forecasts. Eurozone GDP will rise by 0.7% in 2023 (instead of the 0.9% expected in June), of 1.0% in 2024 (in June it was 1.5%) and of 1.5% in 2025 (instead of 1.6%). But no alarm went off in Frankfurt: there will be no no serious recession, at most stagnation for a few quarters.

Nothing to worry about in short, also because theEmployment remains very strong and the bet is that wages will support the recovery, especially with inflation falling. For now, in short, the appointment with the rebound has only been postponed to 2024. The stock markets are taking the new rise well, especially because this time it is accompanied by a message from doves: for the Governing Council, rates «have reached levels which, if maintained over a sufficiently long period, they will make a substantial contribution to a timely return of inflation to target.” The president Christine Lagarde, pressed by those who ask her if this is the end of the increases, she is forced to specify that “we cannot say that we are now at the peak of rates”. You will decide from time to time, always looking at the data. During the meeting, she explains, some board members wanted a break. But then a “solid majority” made the decision to stand up once again. The tones, however, are decidedly different. The messages about the future are promising: monetary policy is being transmitted “much more rapidly than in the past”, says Lagarde. The change in perspective is there and is being grasped by both markets and analysts. Some already see a rate cut on the way in the middle of next year. For Antonio Cesarano of Intermonte, the ECB has resolved the compromise between «hawks and doves by granting the former the rate increase and the latter the explicit call for a guidance very close to the hypothesis of a final increase accompanied by rates stopped for a long period of time.”