Faced with higher inflation, the ECB is tightening its monetary policy

The European Central Bank announced on Thursday, June 9, the strengthening of monetary policy. Faced with inflation, which is expected to reach 6.8% in 2022 ECB decided to raise key interest rates and suspend the securities purchase program. Although these measures should have only a limited short-term impact on inflation, many observers are concerned about the risk of fragmentation in the euro area.

ECB notification

European Central Bank (ECB) announced on Thursday, June 9, strengthening monetary policy. Although these announcements were expected in the context of accelerating inflation in the euro area, they provide an opportunity to clarify the contours of monetary policy in the coming months.

Specifically, ECB decided:

  • Their future increase in key interest rates : one of the 25 basis points (ie 0.25 percentage points) in July and then another in September, the amount of which is not specified at this stage. Impact on the cost at which commercial banks can refinance themselves with assistance ECBkey interest rates may also be raised again during the year depending on the inflation trend.
  • Termination of net purchases of securities made under the Securities Purchase Program (or Asset Purchase Program) from July 1. Launched for the first time in 2014, this program was suspended in 2018 and then resumed in November 2019. This program, an unconventional monetary policy measure, aims to combat the risk of deflation in the euro area. This decision with ECBwhich is sometimes called quantitative narrowing (QT) should have an effect reduce the size of the Eurosystem’s balance sheet.

Inflation forecasts have been revised upwards

The strengthening of monetary policy announced in ECB falls into the context of a accelerating inflation. Linked, in particular, to the strong economic recovery from the Covid-19 crisis, to the disruptions that are still going through value chains – in particular through China’s Zero Covid policy measures – and to the war in Ukraine, Iprice increases must be sustainable and stronger than originally expected. Until ECB forecast inflation of 5.1%, 2.1% and 1.9% on average in the euro area in March last year, 2022, 2023 and 2024, respectively, and now he expects inflation at 6.8%, 3.5% and 2.1% for the same years.

Inflation forecast in the euro area

The effects to be expected from this strengthening of monetary policy

Monetary policy pursued by the central bank many economic consequences. We will focus on three aspects: inflation, the development of economic activity and stability in the euro area.

To reduce inflation?

In recent years ECB headed by a especially moderate monetary policy, characterized by particularly low and even negative key interest rates for some measures and quantitative easing. This moderate monetary policy was intended to stimulate and curb inflation the specter of deflation, ie a situation where prices fall. A return to inflation well above the ECB’s 2% medium-term target means that it is no longer needed for ECB pursue such an adaptation policy.

Strengthening Russia’s monetary policy ECB will this reduce inflation? If the question divides economists, it still remains likely that the decision with ECB I have only one irelatively small impact on short-term price changes. Current inflation is, in fact, largely imported “Because it is closely related to the increase in energy costs.

Towards a slowdown in economic activity?

The ECB further it provides economic activity will develop less rapidly in 2022 and 2023 than originally forecast. According to his latest forecasts, real GDP in these two years should indeed increase by 2.8% and 2.1%, while forecasts made last March, expected economic growth of 3.7% in 2022 and 2.8 % in 2023.

Forecast of real GDP growth in the euro area

Although the strengthening of monetary policy is far from the main factor explaining this economic slowdown, it should contribute to this, in particular increasing the cost of credit and slightly changing the terms of financing within the euro area.

Towards the risk of fragmentation within the eurozone?

Slowing economic activity is not the only risk ECB strengthening its monetary policy. Many observers are concerned about the return of risk fragmentation of the eurozone. From messages in ECB On Thursday, June 9, at the beginning of the day, p spread Thus, Italy has grown sharply and approached the level reached in March 2020 at the beginning of the Covid-19 pandemic. In particular, it exceeded the mark of 200 basis points, or 2 percentage points.

The evolution of Italian distribution

If is spreading remain in the euro area at levels still well below those recorded during the eurozone sovereign debt crisis in the early 2010s, and their increase could, if continued, be disruptive. ECB. This indicates a risk fragmentation in the euro area, where a Differences in funding conditions between the 19 eurozone countries could make the ECB’s monetary policy, unique by definition, less effective.