Christine Lagarde announced new interest rate hikes by the ECB scheduled for July. The new hikes are due to the need to counter inflation in the Eurozone. Which continues to be very high and, according to Lagarde, will remain so for a long time.
Let us then try to understand what the ECB’s strategy consists of and why interest rates continue to rise.
Inflation in Europe, why does the ECB keep raising rates?
Inflation in the Eurozone continues to be very high with levels well above 3%.
To be more precise, inflation levels in Europe are at an all-time high since 2022. And while there has been a slowdown in the rise of inflation in recent months, we are still a long way from a reversal.
In June 2023, prices increased by 6.4 per cent compared to June 2022. Thus when the ECB’s inflation containment strategy had not yet been implemented.
The increase in June, although significant, is the ‘lowest’ inflation of the year. And this appears to be a positive sign, showing that inflation is on a downward trend.
This does not mean that inflation is decreasing, it simply means that inflation is increasing more slowly.
June’s rise in inflation to 6.4 % appears more moderate than in May, when increases were in the order of 7.6 %, and led the ECB to raise interest rates by 0.25 %. However high the rise in inflation in May, it still appears to be well below the all-time high recorded in autumn 2023 when increases were 12%.
Overall, prices in the euro area appear more than 16% higher than in June 2021. While interest rates rose by more than 4%.
The cause of inflation
According to Christine Lagarde, President of the European Central Bank, while a few months ago the rise in inflation was caused by the energy crisis, now that the energy sector has calmed down and returned to stable levels, there are other factors contributing to the rise in inflation.
Among the various factors, the most significant one, which affects price rises by more than 2/3, seems to be corporate profits.
The International Monetary Fund claims, similarly, but more restrainedly, that corporate profits affect the rise in inflation by 49%.
New price increases coming in July
In any case, the only tool the ECB can use to counter rising prices is to raise interest rates.
Which is why, in July, the ECB announces there will be a new hike. No price rises seem to be on the agenda for August. And the debate on price rises and assessments for new future price rises is postponed to September when the ECB will have to consider whether or not to proceed with new price rises.