Thursday, March 30, 2023

The ECB will raise rates by half a point in March and will evaluate what to do next

The European Central Bank (ECB) is going to raise its interest rates by half a percentage point in March and will evaluate the pace of the next increases, until they reach restrictive territory, so that underlying inflation, which rises due to services, falls.

The ECB says that on February 2 the Governing Council broadly supported raising the price of money by 50 basis points to 3%, according to the minutes of the meeting, published on Thursday.

The Governing Council also considered in February that it was necessary to communicate the intention to increase interest rates by another half a percentage point in March and then assess the pace at which the increases will continue.

In fact, further increases are needed for ECB interest rates to “enter tight territory”, where they curb inflation and constrain economic growth.

The ECB also believes that it will be necessary to keep these rates at sufficiently restrictive levels to ensure that inflation falls to 2% on time.

Headline inflation falls but core inflation rises

Headline inflation in the euro area fell in February for the fourth consecutive month on lower energy prices, but prices for food and services rose more.

Consumer prices rose in the euro area in February by 8.5% year-on-year (8.6% year-on-year in January).

But core inflation, which excludes energy, food, alcohol and tobacco prices because they are more volatile and is the one that worries the ECB the most now, rose to 5.6% (5.3% in January) due to inflation in services of 4.8% (4.4%).

At the meeting on March 16, the Governing Council of the ECB will take into account these new inflation figures to decide its next interest rate increases.

“The monetary policy meeting in March would provide a stop at which to assess the further pace of monetary policy,” the minutes say.

“The Governing Council would thus ensure that decisions on future interest rates depend on data and are taken meeting by meeting,” the report added.

Energy prices have fallen significantly and returned to levels prior to the start of Russia’s war in Ukraine, meaning the euro zone’s fossil fuel import bill will be cut considerably, according to the minutes.

However, the Governing Council warned at the February meeting that the energy markets are skeptical about whether this drop will persist because part of the drop is explained by the fact that the winter has been mild in Europe, which will not necessarily be repeated next year. .

In addition, the reopening of the Chinese economy will increase its demand for natural gas and make China a “strong competitor to Europe for liquefied natural gas”, pushing up gas prices and hurting growth, some ECB members said in February.

The president of the ECB, Christine Lagarde, has said in an interview with Antena 3 that she is sure that they will raise interest rates in March and also afterwards.

Several members of the Governing Council have recently come out in favor of raising interest rates by half a percentage point in May as well and others have warned of the risks of raising them too fast.

The euro area will avoid recession

The ECB’s chief economist, Philip Lane, and other members of the Council agreed at the February meeting that “the euro area may avoid recession”.

The economy has been more resilient than the ECB expected and should recover in the coming quarters, so the ECB has more room to raise the price of money.

The eurozone unemployment rate held steady at 6.7% in January this year compared to December 2022.


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