The summer of 2022 will be remembered for its record temperatures, after the episode of extreme heat that several European countries experienced. On the economic level, the record inflation figures (8.6% in June in the euro zone, 10.5% in Belgium according to Eurostat’s measurement) are also making an impression, not to mention that new records could still be reached in July.
The summer of 2022 will be remembered for its record temperatures, after the episode of extreme heat that several European countries experienced. On the economic level, the record inflation figures (8.6% in June in the euro zone, 10.5% in Belgium according to Eurostat’s measurement) are also making an impression, not to mention that new records could still be reached in July. Faced with this record inflation, this summer of 2022 will also be remembered as THE moment when the European Central Bank (ECB) decided to raise its interest rates. This hadn’t happened since…2011. Moreover, while it had initially planned to raise rates by a quarter of a percent, the decision to double down at the last moment is interesting in more ways than one. First of all, this decision allows the ECB to get the euro zone out of the period of negative rates more quickly than expected. Have they been a good thing for the European economy? It will probably take a little more time to analyze the exact contribution of this atypical strategy. The US central bank has never risked it. Admittedly, it has enabled governments to benefit from particularly attractive interest rates. But it also had a cost for savers. Next, we know very well that the interest rate hike of July 21 will not bring inflation down in the short term. This hike, and other potential hikes, are all aimed at lowering inflation expectations and restoring the reputation and credibility of the ECB as an inflation fighter. By taking such a decision, the ECB is showing its desire to catch up with the reality of galloping inflation: if we don’t raise rates vigorously now, when will we do so? Finally, the decision of July 21 may also show that the window allowing the ECB to continue what Ms. Lagarde had called in June a long journey is rapidly closing. And in this context, it was better to proceed as quickly as possible with the rate hike of half a percent initially planned for September. But on this point, it must be admitted that the ECB is quite vague. On the one hand, it no longer stipulates that it will proceed with “multiple rate hikes” but will make its decisions “meeting after meeting”. It is therefore much less certain of the economic development of the coming quarters. But on the other hand, Ms. Lagarde continues to insist that the desire to resume a series of activities (including tourism), the use of savings accumulated during the pandemic and government support measures to deal with the increase in energy prices are likely to maintain household consumption. These arguments, which I personally take with great caution as they seem optimistic to me in the current situation, would argue for raising rates further in order to curb demand and, ultimately, inflation. But wouldn’t it be a bit like the snake biting its tail…? Weighing these various arguments, we can envisage a further rate hike of 50 basis points in total before the onset of winter. Thereafter, as I said, the window will be closed. Instead of a long rate hike trip, the ECB’s policy normalization looks more like a short break.