The new governor of the Bank of Spain, José Luis Escriva, makes his debut this Thursday at the Governing Council of the European Central Bank (ECB), which will resume the cuts in reference interest rates, barring any major surprises. The monetary institution reduced the official “price” of money for the first time in eight years in June – the last decision in which former governor Pablo Hernández de Cos intervened – and was left waiting in July, when our country presented itself with Margarita Delgado as interim governor, with voice but no vote.
Escriva will make his debut with the task of “controlling” inflation (in monetary policy jargon) already practically completed, even if the ECB itself cannot demonstrate the impact of the aggressive cycle of interest rate hikes that began in July 2022, from 0% to 4.5% where it left them in the fall of 2023, until it begins to reduce them in June. Meanwhile, the monetary austerity of the Frankfurt-based institution has allowed banks to increase their profits to historic levels, to suffocate the “pocket” of families mortgaged at a variable interest rate through the Euribor – 70% of the total in Spain – and to stifle access to loans and financing in general, both for households and businesses.
This blow to activity is the ECB’s way of seeking to intervene on price increases. The theory is that by harming demand (the ability of families to consume or businesses to invest), supply (businesses) adjusts the prices of their products and services. This strategy involves the risk of leading the economy into a recession and, consequently, the destruction of jobs. Indeed, activity has stagnated in the eurozone, with the notable exception of Spain, for various reasons, such as the unprecedented growth of the external sector (tourism but also exports of other services) and the positive structural changes in the labor market, with a record creation of less precarious jobs after the labor reform and the increase in the SMI.
In the meantime, the inflationary crisis has only subsided when the extraordinary shocks that caused it have become less significant. That is, when the end of the pandemic is far away and the Russian invasion of Ukraine has stopped distorting the energy market. As Ángel Talavera, chief economist for Europe at Oxford Economics, commented on Wednesday, “it is still too early to make predictions, but the fall in oil and fuel prices will push inflation below target in September.” [de los bancos centrales] by 2%. »
In August, price increases remained at 2.2% (compared to the same month last year) in the euro area as a whole, as in Spain. “We expect the ECB to cut interest rates further by 0.25 percentage points and reiterate its data-driven statements and [ir decidiendo] meeting by meeting to determine the level and duration of restrictive conditions [de acceso al crédito]”, explains the team of analysts at Bank of America. These experts emphasize that “the weakening of the growth outlook” has opened “internal discussions” within the institution to “know whether this justifies faster cuts”, as admitted by sources from the ECB itself.
“Maintaining high interest rates could prove counterproductive, since it would increase inflation instead of reducing it,” warns Eric Dor, professor at the IÉSEG School of Management. “It would depress demand and therefore further reduce activity and production, while companies are reluctant to reduce employment in the same proportion because of the subsequent difficulties in finding qualified workers.” According to this chain of events, “apparent labor productivity would decrease, therefore the increase in the wage cost per unit produced and, therefore, inflation would increase if companies transferred their costs to their prices.”
“Therefore, encouraging a recovery in demand and activity by cutting rates could be helpful in making the decline in inflation sustainable,” he concludes. Moreover, “the Federal Reserve has made it clear that it could start cutting interest rates as early as next week’s meeting on September 18.” This “makes it easier for the ECB to cut its own rates this week, as it avoids the risk of an inflationary depreciation of the euro.”
This Thursday, the ECB will begin to change the way it considers official interest rates. The government council will apply, as of September 18, the adjustments to its monetary policy tools that it announced in March 2024. Among them, it recalls that the main interest rate – that of the “main financing operations”, as defined by the Bank of Spain and which is at 4.25% – it has not been used for a decade for operations between banks and it is the deposit facility – which is at 3.75% – that sets the “price of money” on the market.
“This change is linked to the ECB’s response to the successive crises that have shaken the eurozone in recent years and that have led to an influx of liquidity into the markets. In these conditions, what matters to banks is not the interest rate at which they can obtain excess liquidity, but the rate at which they can deposit this excess liquidity in the Eurosystem – in the Bank of Spain, in the case of our country. -. In other words, the rate of “main operations” is no longer the reference, but rather that of the deposit facility,” they explain from the Bank of Spain.
In the same vein, the ECB will reduce the gap between the interest rate on the main financing operations and that of the deposit facility from 0.5 points to 0.15 points. “It may give the false impression that there has been a greater drop in rates than what actually happened (if there was one)”, adds the Bank of Spain. “If the rates were maintained on Thursday, the rate on the main operations would automatically decrease by 0.35 points. If it is decided to reduce by 0.25 points, that of the main operations would decrease by 0.6 points”, the organization details.
These changes announced in March recall that “the main objective of the operational framework [del BCE] “is to ensure the effective implementation of monetary policy in accordance with the provisions of the Treaty on European Union (EU).” Mainly to keep inflation under control close to the theoretical target of 2%. Furthermore, the institution’s press release adds the “secondary” objective of “supporting general economic policies” [comunitarias]in particular the transition to a green economy, without prejudice to the ECB’s primary objective of price stability. The ECB once again omits any specific mention of the labour market.
Other changes
The revision of the central bank’s “operational framework” focuses on the technical aspects of the tools to ensure the liquidity of the banking sector and continues to benefit it directly. For example, the ECB has decided to maintain the required reserve ratio for banks at a ratio of 1% (here is the technical explanation). Likewise, the remuneration of these required reserves that the entities must keep in the Eurosystem – the Bank of Spain in our case, and the rest of the central banks of each country in the eurozone: the Bundesbank, Banca d’Italia or Banque de France – remains “unchanged at 0%”, the institution underlines in its press release. In this way, the rest of the money that the banks “park” in the central banks will continue to be remunerated according to the interest rate of the deposit facility (which is currently at 3.75%), with public money.
Sumar’s proposals in Spain or by various European lobby groups to increase the percentage of money exempt from remuneration of the total that banks park in central banks have fallen on deaf ears. “Eurozone banks are making risk-free windfall profits exceeding €140 billion in 2023 simply by depositing funds in the Eurosystem,” begins an open letter published in March by Positive Money EU, a non-profit organization that fights for a fairer world and a fair monetary and banking system.
These “extraordinary” profits were close to 10 billion for Spanish entities in 2023. In reality, according to Sumar, it is a public transfer. In addition, they represent a good part of their record profits: 26 billion in the case of the big banks, which have also benefited from the expansion of their margins thanks to the rate increases and their transfer to the Euribor of mortgages and to the cost of loans in general.
“The significant transfer from the public treasury to the banks [por la remuneración del mecanismo de la facilidad de depósito] causes the Bank of Spain to record losses in 2023. These losses are offset by provisions in its income statement, but they will reduce the bank’s net worth. However, both last year’s losses and the provisions made in previous years on the regulator’s profits have led to a substantial reduction in government revenue due to the reduction in dividends paid by the Bank of Spain to the Treasury,” explains Sumar. These dividends usually amount to around $2 billion a year and in 2023 they were zero.
“We urge the Government Council [del BCE] to consider a review of minimum reserve requirements,” the Positive Money letter continues. “It is very worrying that, while banks receive 3.75% for the money they leave in the Eurosystem, their customers receive minimal remuneration on their savings,” states the public complaint, signed by experts such as Yuemei Ji of University College London; Paul De Grauwe of the London School of Economics; Sebastian Diessner of Leiden University; Andrea Roventini of the Sant’Anna School of Economics; or Philipp Heimberger of the Vienna Institute for International Economic Studies.
