The ECB will begin to ease its ineffective and harmful austerity policies with a 0.25 point rate cut.

Barring a surprise, the European Central Bank (ECB) will begin to ease the ineffective and harmful tight monetary policy it has been implementing in the eurozone, cutting official interest rates by 0.25 points this Thursday at 2:15 p.m. after the next meeting of its governing council. It is unclear what it will do next: in July, September… and whether this first drop will remain just a symbolic act.

The news for now is that the institution will begin to reverse the rise in the “price” of money that began in July 2022, from 0% at that time to the 4.5% at which it had maintained it since last fall. fight against inflation. Another decision would be an absolute shock, as both ECB President Christine Lagarde, through Vice President Luis de Guindos, and most members of the governing council have been pushing for a cut in benchmark interest rates in recent weeks. . And this is exactly what experts, analysts and investors working in financial markets (banks, funds…) expect. And so it was transferred to Euribor, as can be seen in the first chart.

“The time has come,” agrees Ruben Segura-Cajuela, Bank of America’s chief European economist. It is “time” to move away from the orthodox and aggressive strategy of strangling families and businesses by making mortgages and lending in general more expensive to meet demand and therefore moderate inflation. The “flame-thrower” policy, with which the ECB did cause damage, but with which it had little or no involvement in normalizing price increases, is the institution’s main mandate.

Raising interest rates risked pushing the eurozone economy into recession while ignoring the fact that the inflation they were trying to suppress had more to do with supply-side problems than demand-side problems: global trade bottlenecks heading out of the crisis. health restrictions due to the pandemic, the energy crisis that arose for the same reason and aggravated the Russian invasion of Ukraine…

In the case of Spain, energy prices skyrocketed from 2021 until mid-2022, contagious and pushing overall inflation to highs not seen since the 1980s in our country. This was a global trend and it put a historic bite in the pockets of workers, from which wages in Spain on average have yet to recover.

Since the summer of two years ago, rising prices for electricity, gas and fuel began to slow, favoring overall deflation long before the ECB pushed interest rates to the highest level in this cycle of monetary austerity. Even in the second half of 2022 and 2023, energy was cheaper for several months compared to the peaks of the worst moments, as can be seen in the second graph of this information. In fact, the recent rise in prices has caused headline inflation in Spain to rise again, exceeding 3% year on year, after remaining close to monetary policy’s theoretical target of 2% in the summer of 2023.

The trend in the eurozone is broadly similar. In fact, inflation is even more subdued, with some specific partners below 2%. The ECB’s spring estimates were already confident that on average it would remain close to the target by the end of 2024. Again, the institution chaired by Lagarde had nothing to do with what happened in recent months. Its economists will update their forecasts this Thursday.

Those who continue to defend the “killing flies with cannons” policy of the ECB and the rest of the central banks of developed countries cling, on the one hand, to the fact that “real inflation depends on previous expectations,” as explained by Eric Dor, director of economic research at the School of Management IÉSEG. In other words, the aggressiveness of the monetary institution serves to create expectations, as a warning.

“The argument is that if managers lower their forecasts of future inflation, companies will be less likely to want to protect themselves from the fear of future cost increases by raising prices immediately. Likewise, if workers lower their forecasts of future inflation, their demands for higher wages, which will then be reflected in higher prices, will be lower. However, reality shows that it is forecasts of future inflation that follow real inflation, and not vice versa,” Eric Dor details.

Dependence on the US Federal Reserve

On the other hand, the same positions apply to dependence on the US Federal Reserve, which has marked the path for raising interest rates (it began several months earlier than in the eurozone) and went further. And why do the Fed’s actions influence the ECB’s decisions? Because there is a risk of a sudden depreciation of the euro against the dollar if the paths of one central bank and the other diverge greatly. And the fall of the “common currency” against the North American currency automatically makes imports of oil, gas and most raw materials that are usually sold in dollars in international markets more expensive. That is, the risk of euro depreciation is an inflationary threat in Spain, Germany, France, Italy…

“The ECB’s decision to raise rates after the Fed and cut them before indicates different inflation dynamics on both sides of the Atlantic. Inflation in the eurozone is largely due to supply shortages rather than excess demand. However, it is unlikely that the ECB alone will make more than two rate cuts before the Federal Reserve does so this year,” said Sylvain Breuer, chief European economist at S&P Global.

According to the data, the ECB has achieved a reduction in the supply of credit (loans, mortgages…) from banks, and has also managed to reduce their demand, as can be seen in the third graph of this information. , extracted from the annual report of the Bank of Spain.

Home sales, both used and new, have similarly declined. However, prices have not stopped rising, and experts insist that there is not enough supply, especially public and affordable supply. In other words, the ECB’s actions not only failed to contain inflation, but also dealt a triple blow to workers: rising consumer prices themselves, rising mortgage prices and rising living standards in the mortgage market. place.

The direct effect of the ECB’s decisions on monetary policy was noticed by banks, which did not stop increasing their profits. But the arguments that are permeating the governing board of the eurozone institution to resist guaranteeing a significant cut in interest rates in the coming months, following the first cut this Thursday, is the risk that wages will continue to rise…

The ECB’s analysis barely takes into account the inflation created by large companies when they translate rising energy prices into selling prices to protect or increase their profits. Nor the damage that “expensive” finance causes to household consumption, activity in general and productive investment in particular, despite the fact that it is now extremely important to continue the fight against climate change, against inequality and to promote the digital transition.