The European Central Bank (ECB) rules out any commitment to lower benchmark interest rates again in December. The minutes of the last meeting on monetary policy of the institution’s Governing Council show that some governors would have even preferred to postpone the October cut. The ECB then decided to reduce the official “price” of the currency by 0.25 points, to 3.25%. This is the third decline in this phase of easing of financing conditions due to moderating inflation and slowing economic growth.
“Some members [del Consejo de Gobierno] “They initially expressed their view that they would have preferred to accumulate more information and wait until December, when a full assessment of the medium-term inflation outlook would be available,” reflect the minutes released by the ECB on Thursday. “However, these members understood that preventive risk management justified a rate cut now,” they continue.
The institution’s Governing Council is made up of the governors of the national central banks of each euro zone country and the executive committee chaired by Christine Lagarde and of which Luis de Guindos is vice-president. “Looking ahead, members stressed that they remain committed to ensuring that inflation returns to the medium-term objective of 2%. [los últimos datos ya están en ese nivel, o por debajo]and that they will maintain sufficiently restrictive interest rates for as long as necessary to achieve this objective,” the minutes state.
“They will also continue to apply a data-driven, meeting-by-meeting approach to determining the appropriate level and duration of restrictions. There should be no prior commitment to a given tariff trajectory in order to have the freedom to react if necessary,” specifies the document, available here (in English).
The blow of monetary austerity on the economy
Last week, a report from the Bank of Spain indicated that the ECB’s interest rate increases since 2022 have subtracted 2.5 points from Spanish growth over the past three years and will continue to weigh on growth. of GDP (gross domestic producer) in 2025. The Bank The Republic of Spain estimates that the damage caused to the real economy by monetary austerity will reach a total of almost 40 billion euros between 2022 and 2025.
Furthermore, the institution headed by José Luis Escriva emphasizes that the “tightening” of financing conditions has barely reduced average inflation each year by a few tenths, but welcomes that it has been “fundamental in anchoring expectations” regarding price increases.
According to their calculations, the increases in the official “price” of money that the ECB began in June 2022 to fight inflation subtracted half a point from the growth of economic activity in 2022, in full recovery of the shock of the pandemic, barely more than half a point. one point in 2023 and almost another point in 2024.
Central banks assume the damage caused to the real economy (to families, businesses, etc.) as part of their strategy to fight inflation. Monetary austerity is in effect a way of stifling household demand and the ability of businesses to invest by making mortgages and loans in general more expensive. In its 2022 annual report, the Bank of Spain highlighted “the transmission channels” of interest rate increases. Among all these phenomena, the “intertemporal substitution effect,” which refers to the “contraction of spending” due to the increase in the “price” of currency, was the biggest blow to the economy. The next one was the “income effect”. Or, which amounts to the same thing, “the contraction of expenses” in this case due to the “decline” in family or business income.
According to the Bank of Spain’s plan, interest rate increases will continue to harm “demand” in the coming months, even if in June 2024 the ECB decides to start reversing monetary austerity.
