The European Central Bank’s (ECB) roadmap foresees a decrease in interest rates of 0.25 points each quarter until they remain at 2.5% in the fall of 2025, as well-informed sources revealed to elDiario.es. In June, the end of the monetary austerity cycle began. Since then, it has reduced the official “price” of the currency twice, from 4% to 3.5%.
With this plan, the ECB Governing Council hopes that inflation will stabilise at the theoretical target of 2% within a year and is confident that the eurozone will avoid recession. In this “central scenario”, the main body that decides on the monetary policy of the “common currency” countries is divided in two according to the main risks that currently exist. One part of the Governing Council is concerned about the weakness of economic growth, particularly in Germany. The other, more orthodox, is concerned about the “rigidity” of services inflation.
The ECB’s Governing Council is made up of the central bank governors of each eurozone partner and the European institution’s Executive Board, chaired by Christine Lagarde and of which Luis de Guindos is vice-president. On 12 September, the new governor of the Bank of Spain, José Luis Escriva, made his debut at the regular meeting of this body, which is held every six weeks. This Tuesday, the former minister officially took office at an event in Madrid. The ECB’s next monetary policy meeting will take place on 17 October and the next one on 12 December.
“José Luis Escriva has joined the circle of governors and we have welcomed him. Like other governors, he has made very useful contributions. And I hope that, like any other governor, he will continue not only to bring his personal points of view, which can be inspired in part by the Spanish situation, but that he will have that European dimension that other governors also have when they sit at the table of the government council. It is a process and it is a path that I hope will be productive and enjoyable, both for him and for the group of governors around the table. But I can assure you that he has been well received and that he has contributed,” Lagarde explained at the press conference after the former minister’s debut.
As elDiario.es has learned, given the division within the ECB’s governing council, Escriva defends a consensus position. Price increases have already moderated to 2.2% in the eurozone as a whole in August, at an interannual rate. And 2.3% in Spain. In other words, inflation remains true to the ECB’s theoretical target. At the same time, the weakness of economic activity in some countries, including Germany and France, is evident. Above all, in the industrial sector.
Our country is a notable exception at the macroeconomic level due to the “attraction” of tourism, the strength of the rest of the foreign sector and the structural change in the labor market, with a historic creation of jobs. But it is precisely access to housing, due to rising prices, that constitutes the main problem for families, especially for the most vulnerable and in the capitals and tourist areas, where work is concentrated.
“Spain is one of the countries where the rise in rates weighs most heavily. Households pay higher interest due to the prevalence of variable rate mortgages and have lower interest to pay. [de los depósitos]”In Germany and France, it is households that are actually benefiting from this increase,” explains Ángel Talavera, chief economist for Europe at Oxford Economics.
On the other hand, the overall weakness of the German and French economies currently poses the greatest threat to part of the ECB Governing Council. The risk is that the aggressiveness of rate hikes has gone too far and that inflation will fall below 2% within a year or more. In this scenario, the main fear would be deflation, a “monster” that could be even more impoverishing than inflation because it is linked to a recession and job losses.
In short, the ECB’s strategy of hurting the economy by raising interest rates to combat rising prices has always assumed this possibility. In fact, another part of the monetary institution’s governing council remains more aware of the resistance to moderating inflation in services.
“Services inflation has remained stubbornly high in recent months. However, a gradual decline is still expected, with wage growth and other costs falling, while the lagged impact of the previous monetary policy tightening continues to feed through to consumer prices,” details the latest projections report from the ECB itself.
According to the institution’s analysis, this forecast is being called into question for two reasons. The first is due to the “lack of labour” across the eurozone in the tertiary sector, which could mean “further wage increases”. The second is due to the shift in household consumption trends towards leisure after the shock of the pandemic. A transformation that makes demand more resilient despite the damage caused by the rise in the cost of mortgages and loans in general.
At present, with official interest rates at 3.5%, financing conditions remain “restrictive”, as the ECB itself describes them, meaning that they harm the purchasing power of families and the investment power of businesses.
After two descents official interest rates in the eurozone, the US Federal Reserve (Fed) announced last week its first cut in this cycle of monetary austerity. The North American central bank eased the official “price” of the currency by half a point, in a range of between 4.75% and 5%.
The larger-than-expected cut is the Fed’s first since 2020, when it left interest rates between 0% and 0.25% to help the pandemic recovery. In March 2022, it began raising them aggressively to fight inflation. The ECB waited longer to follow that same path, until June 2022. Now, the Fed has reversed course for the first time, anticipating further cuts for the rest of the year.
The Fed’s decision opens the way for further rate cuts by the ECB. The institution chaired by Lagarde is conditioned by the Federal Reserve because if a significant gap opens between the rates of the eurozone and those of the United States, a depreciation of the euro could occur against the inflationary dollar, since automatically imports of oil and other materials Premiums or products traded in dollars would become more expensive due to the effect of the exchange rate.
