The European Central Bank (ECB) this Thursday cleared up all doubts about the path it would take in the most controversial meeting to date. Finally, the organization decided by “a solid majority” to raise interest rates in the Eurozone for the tenth consecutive time, driving the refinancing rate – the one that marks the interest charged on loans such as mortgages – to 4.5%, which are highs since 2001, and the deposit rate at historical levels of 4%. The result of the vote is striking considering that neither of the two most hawkish (or in favor of containing inflation by raising rates) had the right to vote on this occasion, as are the German Bundesbank and Belgium.
After yesterday’s latest rise, everything indicates that Eurozone official rates have peaked. There will be no more increases, so in the October and December meetings (the two missing in the year on monetary policy) the Governing Council of the ECB will lean towards a pause, predictably, in an escalation that is unprecedented in the history of the institution, although the president of the ECB, Christine Lagarde, has preferred not to say it outright. “What we have decided, and it has been reflected twice in today’s statement, based on all the numbers and forecasts that we have available, is that we consider that interest rates have reached levels that, maintained for a sufficiently long period, will contribute substantially to the prompt return of inflation to the target“said the head of the ECB during her appearance.
The market’s focus has now been redirected to assessing how much time the long enough (or sufficiently extensive) that the ECB has been repeating like a mantra for months to control inflation. Lagarde said publicly yesterday that it was not on the table on this occasion to determine the period for which the official rates will remain at maximums, but the truth is that the estimates of the group of analysts speak, at least, of the summer of 2024. This implies that , if true, and the estimates are metthe ECB could lower rates in June/July next year, which implies that for those households that have signed a variable-rate mortgage they will not enjoy some respite until September 2024, when the fee is recalculated with lower rates than the current ones. It should be remembered that Spanish banks, as a general rule, take as a reference the closing of the Euribor two months ago to recalculate monthly mortgage payments. Meanwhile, the ECB will use the tools at its disposal to complement high rates with lower asset purchases (through the APP program), which is a way of draining the liquidity that has flooded the market. This will also affect the PEPP, the specific Emergency Program that was created as a result of Covid.
The ECB, which says it is aware of the impact that its restrictive policy is having on European society, has undertaken a movement of such virulence that it has not allowed the most vulnerable households to adapt to the new situation. The last time that the Central Bank carried out a sustained increase over time was between 2005 and 2007, when it raised the official rates on up to eight occasions, from 1.25% (from the 1% set in 2003) to 3.25% in July 2008. On this occasion the ten increases have occurred in less than fifteen months.
Lagarde is aware of the criticism, but it is true that this week’s decision was going to raise blisters regardless of the result. “The battle being fought against inflation is making progress. In October we were at 10.6% and it has fallen by half. Is it satisfactory? No. We are doing this not because we want to cause a recession, but so that less privileged population can have price stability,” said Lagarde when asked by journalists.