The European Central Bank (ECB) it will continue to raise interest rates if the eurozone is caught in “a shallow recession”. Of course, the institution you might want to pause “if there were a long, deep recession”which would possibly curb inflation to a greater extent.
This is clear from the minutes that the institution kept at the end of October. In it, the members of the Governing Council also focused on the divergence between monetary policyincreasingly restrictive, and fiscal policy, which was becoming more expansive.
Although Council members raised interest rates 75 basis points in October by a large majority, not all of them agreed with the decision. Some expressed their preference for raising official rates by 50 basis points and thus bring forward the reduction expected by investors.
[El BCE mantendrá la política de subidas de tipos más agresiva de su historia pese al daño a la economía]
Those responsible for monetary policy in favor of a lower increase argued in their favor that the increase would be accompanied by a signal about the need for new increases, a change in the remuneration of minimum reserves and the adjustment of the terms and conditions of the TLTROs. III.
Just a few days ago Bloomberg already informed that more and more members of the Governing Council of the ECB are in favor of an increase of 50 basis points, which would mean put aside the increases of three quarters of a point executed in the last two appointments.
[El Consejo del BCE discute ralentizar la subida de tipos en diciembre a pesar de que los precios se mantienen al alza]
And this, despite inflation set a new all-time high of 10.6% in the euro area during the month of October -five tenths more than in September- as a result of the rise in energy and food prices. The figure multiplies by five the target of 2% set by the ECB.
Inflation in the euro bloc does not seem to have peaked despite the fact that the threat of a recession is more intense now, as pointed out by the president of the ECB, Christine Lagarde, in one of her last public appearances.
The French made that reflection despite the fact that the growth data for the euro area have been better than expected. The gross domestic product (GDP) of the euro block slowed its rate of expansion between July and September to 0.2% from the 0.8% observed in the second quarter of the year. It was the weakest growth since the first quarter of 2021.
If the PMI index is taken into account, Eurozone activity has contracted for five months without interruptiondespite the fact that erosion decreased in November, registering a reading of 47.8 points from 47.3 in October.
For ECB members a technical recession -that is, that the eurozone links two consecutive quarters of contraction- “It was becoming the baseline scenario and the most likely outcome.”.
They also expressed the view that while real GDP for the coming quarter had been repeatedly underestimated in previous projections, the error was now likely to have the opposite sign.
Those responsible for monetary policy also made reference to a downward revision of the economic forecasts published in Septemberin which there would be a deeper recession in 2023 than in the baseline scenario and a higher inflation rate in 2024.
The prospects for a recession have led investors to anticipate an increase in rates of less than 75 basis points at the meeting that the issuing institute will hold on December 15. The chosen increase would be 50 basis points.
The ECB would reduce the pace of rate hikes after having raised them 200 basis points in the most aggressive cycle in its history. In the two previous processes of increases that have taken place since the beginning of the monetary union, the institution took at least 18 months to raise rates by the same amount. Now he has done it in just three months.
ECB documents follow those of the United States Federal Reserve (Fed). The institution chaired by Jerome Powell pointed out in them the possibility of slowing down the pace of future rate hikes.
[La mayoría de los miembros de la Fed, a favor de reducir el ritmo de las subidas de tipos en diciembre]
Those responsible for monetary policy in the United States expressed their concern about delaying the cumulative impact of rate hikes on the economya, which still does not fully reflect it. For this reason, most of them considered it appropriate to reduce the pace of rate increases earlier than expected.
Their argument is that “a slower pace in these circumstances” would allow them to “better assess progress towards their objective” and that this would reduce the risk of an unnecessary impact on economic stability.
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