[Article mis à jour le 11 mai à 12h25]
This is the first time in ten years. Still unwilling to tighten its monetary policy, as several central banks have begun to do, the ECB is beginning to raise interest rates in the euro area. A normalization of European monetary policy could happen early in the third quarter, European Central Bank President Christine Lagarde said as she ended her asset purchase program (APP). “few weeks” rate hike later.
“I expect them [les achats d’obligations] should be completed by the beginning of the third quarter.said Christine Lagarde during a conference in Slovenia. “The first rate hike (…) will occur some time after the end of the net asset purchases (…), which could mean a period of just a few weeks”she added.
The announcement confirms the market’s expectations, which had been anticipating an increase in interest rates in July to keep consumer prices down. Most of the other major central banks have already raised their rates, but the more wait-and-see ECB continues to inject liquidity into the financial system through bond purchases in the markets. Thus, in early May, the Fed raised its key rates by half a percentage point, the first increase of this magnitude since 2000, in hopes of reducing inflation, which reached 8.5% for the year. The Central Bank of England (BoE), for its part, raised interest rates on Thursday to 1%, the highest level since 2009, with the same goal.
In Europe, several factors have led to the current inflationary context, such as the strong economic recovery last year with an improvement in the health situation, the war in Ukraine and the acceleration in energy and fuel prices that accompanied these supply chain breaks, which were exacerbated by the conflict.. While inflation remains more moderate than across the Atlantic, in the euro area it nonetheless reached 7.5% for the year last month, well short of the central bank’s 2% target. Why justify raising rates in July, as a growing number of members of the Governing Council of the ECB have been calling in recent months.
“What started as a one-time shock has now become a larger phenomenon”said Bostjan Vasle, governor of the Bank of Slovenia.
“When circumstances change, a political response must follow,” he added.
Bundesbank colleague Joachim Nagel and Frank Elderson, a board member of the ECB, also called for a rate hike in July on Wednesday. At the end of April, several sources cited by Reuters were expecting at least two rate hikes this year, with some even suggesting a third might occur before December 31.
According to Estonian Governor Madis Müller, the ECB’s deposit rate, currently at -0.5%, could turn positive again by the end of the year, something that hasn’t happened since 2014.
“Even if we raise the rate by 25 basis points, by the end of the year we can reach a positive rate.”“, he said in an interview with Reuters.
Reducing public debt
But this policy will not be without consequences and must be accompanied by efforts to reduce the public debt, warned François Villeroy de Gallo, who laments that too many French people believe that debt “would become limitless and free”.
According to the head of the central bank, who has been expecting rate hikes since the summer, they “will grow, but very gradually (…), but the European Central Bank and the Bank of France will do everything necessary (…) to bring inflation back to around 2% in the next two years”.
“Therefore, it is all the more important for budgetary bodies to ensure debt sustainability in the face of rising rates”added one who is also a member of the ECB.
According to the Banque de France, every 1% increase in interest rates represents an additional cost of almost 40 billion euros a year in ten years, almost equivalent to the current defense budget.
While alerting France’s financial position last January, François Villeroy de Gallo took certain steps to try to contain the public debt. He “This is not about reducing government spending in general, but about striving to stabilize it” limiting their growth in volume to 0.5% per year compared to more than 1% observed in the previous decade, “at constant mandatory rates of deductions”he explained. Although they accounted for 55.4% of GDP in 2019, government spending levels reached 61.4% in 2020 and dropped to 59.2% in 2021, according to INSEE.
Governor dismisses debt relief “it’s a money miracle” : “Some believe that writing off the debt owned by the Bank of France and the Eurosystem would be the solution. This is not the case. The debt cannot be written off, it can be refinanced at maturity, but this is never automatic. And the lender will only refinance if if he is confident in the sustainability of this debt.A lender, private or public, who is not repaid will no longer lend“,