The European Central Bank's "Nine Plus" Difficulty in Solving Inflation Pressure Nine Plus | European Central Bank | Inflation
The picture shows the Euro logo taken on July 27th in Frankfurt, Germany. Photo by Xinhua News Agency reporter Zhang Fan
Since July 2022, the European Central Bank has initiated 9 consecutive interest rate hikes, with a cumulative increase of 425 basis points. High inflation is a key factor that prompted the European Central Bank to decide on a "nine in one" policy, and the external environment is difficult to be optimistic, which further strengthens the European Central Bank's "stability seeking" mentality. The eurozone economy has now entered a dilemma of "high inflation at the beginning and weak growth at the end", which has led to the rapid squeezing of the room for maneuver in the monetary policy of the European Central Bank. Considering the current high risk of economic recession in the Eurozone and the accumulated burden of banking and financial risk pressures from the United States, the European Central Bank still needs to maintain its composure in the future and adopt a more flexible monetary policy that adapts to the actual economic development trend of the Eurozone based on the "stable inflation" decision-making approach.
On July 27th local time, the European Central Bank's monetary policy meeting decided to raise interest rates by 25 basis points starting from August 2nd. The three key interest rates, namely refinancing, marginal lending, and deposit mechanisms, will be raised to 4.25%, 4.50%, and 3.75%, respectively. In order to ensure that the effects of monetary policy adjustments are fully transmitted to the money market, the European Central Bank has also decided to reduce interest payments on reserves and set the minimum reserve rate at 0. This is the 9th consecutive rate hike initiated by the European Central Bank since July 2022, with a cumulative rate hike of 425 basis points. Since then, the European Central Bank has once again broken its record for the most aggressive monetary tightening cycle in history. However, after eight consecutive rounds of interest rate hikes, the ninth round of policies that met market expectations did not show any unexpected turning points, but instead reflected the European Central Bank's prudent policy considerations.
High inflation is a key factor driving the European Central Bank to decide on a nine in one plan. The post meeting announcement released by the European Central Bank pointed out that in order to promote a decline in inflation rates, it is still necessary to maintain high levels of the three key interest rates in the Eurozone. The European Central Bank believes that changes in inflation levels will be the key basis for interest rate adjustment decisions. The data previously released by the European Central Bank showed that the overall inflation rate in the eurozone in June was 5.5%, a decrease of 0.6 percentage points from the previous month. However, the relevant level is still higher than the 2% inflation warning line set by the European Central Bank. Considering that after deducting the price fluctuations of basic livelihood products such as energy, food, tobacco and alcohol, the annual inflation rate in June increased instead of decreasing compared to May, rising from 5.3% to 5.5%. Faced with such inflationary performance, it is difficult for the European Central Bank to make an evaluation conclusion that the price level has fully "cooled down". Therefore, when looking forward to future changes in inflation levels, the European Central Bank believes that the inflation rate in the eurozone is expected to decrease within the year, but it may be difficult to fall below 2% in the short term, which somewhat reflects the contradictory sentiment of "unwillingness and dissatisfaction" with the previous multiple rounds of interest rate hikes.
The external environment is difficult to be optimistic, which further strengthens the European Central Bank's "stability seeking" mentality. Currently, the overall weakening of global economic and trade activities, external geopolitical military conflicts, and the spillover effects of the US banking debt crisis have always been the sword of Damocles hanging over the European economy. At the press conference after the meeting, ECB President Lagarde said frankly that the future inflation level is also affected by a high degree of external uncertainty. In addition to the increasingly obvious impact of the Russia-Ukraine conflict on the European economy, the ECB is also worried that other sudden large-scale geopolitical conflicts and systemic financial risks will become "black swans" affecting its own development. Lagarde emphasized that the economic growth situation in the eurozone is also affected by the aforementioned external factors, and the European Central Bank's concern about the growth prospects is constantly increasing.
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Lagarde is not an unfounded concern. The eurozone economy has indeed entered a dilemma of "high inflation at the beginning and weak growth at the end", which has led to the rapid squeezing of the room for maneuver in the monetary policy of the European Central Bank. Based on a comprehensive analysis of multiple core economic indicators in the Eurozone in July, after eight consecutive rounds of interest rate hikes, the effectiveness of curbing inflation in the Eurozone has been limited. However, the real economy has been negatively impacted by monetary tightening policies, and the "side effects" of weak economic growth have emerged. Specifically, after several consecutive rounds of tightening policies, the service and manufacturing industries in the Eurozone have suffered significant negative transmission effects. Major economic engines such as Germany and France have encountered varying degrees of trouble, and market analysis predicts that stagflation in the eurozone economy has become a foregone conclusion in the first half of the year. From the second half of the year to 2024, the eurozone economy may even face the risk of falling into a recession again.
Perhaps the dilemma of policy is becoming more apparent. Compared to announcing the eighth round of interest rate hikes in June, Lagarde claimed to "maintain a relatively high level of interest rates for a period of time" and hinted at implementing a ninth round of interest rate hikes in July. The European Central Bank did not make too clear expectations for the tone of the monetary policy meeting in September. Lagarde himself only stated that the bottom line for the next monetary policy adjustment is "no interest rate cut", but the implementation of the tenth round of interest rate hikes in September is no longer considered a "natural" policy option by the European Central Bank.
Some analysts believe that although the European Central Bank closely follows the Federal Reserve in this round of interest rate hikes, and the United States and Europe have also entered a critical stage of the "second half" of interest rate hikes, given the different economic fundamentals of both sides in recent times, the subsequent monetary policies of the United States and Europe may diverge. Especially considering the current high risk of economic recession in the Eurozone and the accumulated burden of banking and financial risk pressures from the United States, the European Central Bank still needs to maintain its composure in the future, and adopt a more flexible monetary policy that adapts to the actual economic development trend of the Eurozone based on the "stable inflation" decision-making approach.