“High inflation is a major challenge for all of us. » Christine Lagarde’s first sentence, during her press conference on Thursday June 9, marked a profound change in tone. Soaring prices are now strong everywhere in the euro zone, and the European Central Bank (ECB) intends to do everything to control it. “Inflation is too high and we must reduce it”added its president.
As a result, the ECB has undertaken to increase its key rates (the deposit rate is at −0.5%) twice between now and September. A first increase of 0.25 points will take place at its meeting on July 21. A second increase, the extent of which remains to be decided (it will in principle be 0.25 point or 0.5 point) will follow in September. The euro zone will therefore emerge from the era of negative rates on that date.
This is a turning point for monetary policy: the Frankfurt Institute will raise its rates for the first time since 2011. The deposit rate had become negative in June 2014, gradually sinking to −0, 5% at the end of 2019, where it still is today.
Lagarde recognizes “a mistake”
Such an announcement is highly unusual for a central bank. In this quiet world, we normally give indications, we make people understand, but we do not declare in advance what will be the decisions of future meetings of the Board of Governors. The break with routine communication indicates the extent of the pressure under which the ECB finds itself. Inflation is soaring in the euro zone, each month exceeding all expectations. In May, it was 8.1%, unheard of since the creation of the monetary union. In six countries, it exceeds 10%, even reaching 20% in Estonia. The ECB, whose mandate is to ensure price stability around 2% inflation, had to act.
After the “whatever it takes” announced by Mario Draghi in 2012 to calm the public debt crisis, Mme Lagarde today uses a sort of “whatever it takes” to calm prices. “The Governing Council will ensure that inflation returns to 2% in the medium term”, she repeated several times. The President of the ECB wants to cut short the idea that the “doves”, a nickname given to governors in favor of a rather lax monetary policy, have the upper hand over the central bank, and that inflation is secondary.
It was time, will respond the “hawks”, in favor of a stricter approach. Many accuse the ECB of taking too long to understand the magnitude of the price spike. Mme Lagarde recognizes a ” mistake “ in its forecasts, but points out that this comes “unforeseeable events”. The first was the exit from the pandemic, which caused a total disorganization of supply chains. The second is of course the war in Ukraine, which has caused the prices of oil, gas and agricultural raw materials to take off.
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