A new ECB rate hike is planned for 15 June, although the points will be lower than previous hikes. This is due to the current economic situation, which is much less resistant to new rises than in previous months.
The Central Bank has set itself the goal of bringing Eurozone inflation back to 2 per cent for more than a year now, and is using the ECB rate hike as its main weapon.
Because by raising interest rates, the cost of money will become more and more expensive for all services, from financing to everyday spending. And with consumption shrinking, the price of goods and services will tend to fall structurally.
The problem is that as of 8 June 2023, the Eurozone has entered a technical recession, marking a -0.1 per cent of GDP. This is not a tragedy, but a warning sign yes. And also a warning to aim for smaller rises than before.
ECB, new increase from 15 June
The ECB has been raising interest rates intensively in recent months, in order to reduce inflation as quickly as possible and limit its effects on the entire supply chain.
In total, ECB rates have risen by almost 400 points in over a year. A terrifying figure, especially for those who have to pay the instalments on a variable-rate mortgage. Not surprisingly, mortgages are also scheduled to rise again in June.
But unlike previous rises, the one scheduled for 15 June may be more contained.
The ECB has to deal with several issues that have arisen in recent months, first and foremost the entry into a technical recession, with a GDP contraction of 0.1%. And raising rates as before may not help at all.
The reason behind the ECB’s moderate hike
The main reason behind this potentially smaller increase compared to previous increases is only one: technical recession.
A ‘technical recession’ is when the bodies with statistical functions report a decline in GDP for at least two consecutive quarters, showing a continuous economic setback
It is not a full-blown recession, but it could become one. And the consequences would be as severe as high inflation.
Going into recession would be detrimental to the Eurozone, which is already suffering from reduced demand for bank loans and investment. But equally, letting inflation continue to hurt consumers and producers would be an unwise move for Europe’s financial fate.
And perhaps pressing the decision to continue these ‘hawkish’ monetary policies is precisely the fact that inflation can be even more dangerous than a technical recession.
In fact, ECB President Christine Lagarde herself, before the release of the Eurostat data, was inclined to continue with these hikes: despite the decline, inflation is still too high.
The problem of growth and inflation
15 June will not only be the day to raise interest rates. At its next meeting, the ECB will also have to assess the situation regarding growth and inflation.
The situation is not too dissimilar to that of the US Federal Reserve, now in its tenth consecutive hike.
Both of them will have to comment on monetary policy soon, not least because inflation in both the US and the EU is still considerable: 5.5% for the US, and 6.1% for the EU in May 2023.
Only in growth are they different from each other: +1.3% for the US, -0.1% for the EU in Q1 2023. And so also in unemployment, at 3.4% in the US, while in Europe it stood at 6.5% in April.
Now more than ever, the policy of rate hikes may be decisive, although many are hoping for a rate cut as soon as possible, at least to give a breath of fresh air to the financing and mortgage sector.