The ECB’s disgraceful failure: it decides to cut interest rates without controlling inflation

He ECB cuts rates for the first time in eleven years. The Governing Council of the European Central Bank gave this Thursday first collapse restrictive monetary strategy which was forced to start in 2022 due to the galloping escalation of inflation. Thus, as planned, interest rates will increase from 4.50% to 4.25%, which implies a reduction of 25 basis points.

It should be remembered that the organization that manages Christine Lagarde has been the laggard among the world’s central banks in the race to end the economic crisis. most expansionary monetary policy in history. These reckless strategies flooded the world with liquidity in exchange for living Dead economy, forcing them to live far beyond their means. Now, after the easing of the monetary strategy, ECB starts go back to your old ways.

The ECB is not fulfilling its core mandate

It was only in May 2022, when the harmonized consumer price index in the Old Continent exceeded 8%, that the organization decided to remain passive in the face of rapidly rising prices. Since then, the ECB has carried out ten consecutive interest rate hikes, which, however, failed to reduce inflation to

the famous 2% barrier. More precisely, its main mandate.

According to the latest preliminary data from Eurostat, The inflation rate in the eurozone in May was 2.6% on an annualized basis., which is two tenths higher than the price increase observed in April. Thus, prices in the euro area registered the first recovery since December 2023 and the highest level since February last year. That’s why, inflation is still far from under control and the rate cut announced by the organization today is of questionable validity.

“The ECB is not fulfilling its mandate. There is no data in the May consumer price index that justifies a rate hike,” says the economist. Daniel Lacallewhich also warns about the harmful effect of this decision is to encourage partiality for government spending. “Cutting rates will be an incentive to further increase government imbalances in countries that have refused to control deficits and that have also taken advantage of inflation to collect more,” says Lacalle. And Spain is one of these countries.

What if you have to download them again in a few months?

For the economist Javier Santacruz“this fall in rates is try to seem normal. The ECB has been selling normality for months now and has had no choice but to keep its word, knowing that given the latest data we are seeing on inflation and medium-term trends, “This should not have been done.”. Such is the ECB’s mistake that “it is very likely that within a few months Perhaps interest rates need to be raised. because inflation will not stop decreasing,” he predicts. In fact, during today’s press conference Christine Lagarde repeated several times that “we do not adhere to a predetermined type of trajectory.”

The following table shows what happened in May seven countries with inflation above 3%. Among them is Spain. And we must not forget that price increases are cumulative in nature, so this monster has been destroying purchasing power for more than two years, especially middle and lower classes these territories.

In the case of Spain, it is striking how the government Pedro Sánchez stopped comparing inflation in Spain with inflation in the rest of Europe as he did last year, when the results favored the government’s version.

“The ECB makes clear that it has powers that go beyond its statute.because if the only goal is to control inflation, the rate cuts that were loudly announced by all members a few weeks ago, in the mode of core consumer price index recovery and PMI recovery, seem unorthodox,” says the economist and company CEO. TradePRO, Jose Basagoiti.

Connected

Thus, “the ECB confirms what has been an open secret: the only goal is not to control inflation, but to help finance governments and control risk premiums. This environment is what is called “fiscal dominance” and defines a regime where “The central bank does not act independently, but reacts to political interests.” Add. Another derivative that Basagoichi observes is “chronic and non-cyclical inflation, This is why it is important to understand the wealth extraction process that occurs. and who has a long way to go. To protect ourselves from this invisible tax, we can resort to real or financial assets, but we avoid, as much as possible, the accumulation of liquidity.”

Money supply, uncontrollable

Since we publish in Free marketthe main barrier faced by the ECB in controlling inflation is the amount of money in circulation, which does not decrease. “The amount of currency in the system as calculated by the ECB increases significantly in the latest note on monetary aggregates. In addition, calculating the total amount using the Murray Rothbard method (True Money Supply), which includes money in financial aggregates, this shows that the quantity of money did not decrease in 2023, but increased significantly in 2024,” says Lacale .

So the annual growth rate of the eurozone’s broad money supply, M3, “increased to 1.3% in April 2024 from 0.9% in March,” says Lacale, who estimates that real money supply would have increased by 4.5 % in April. 2024, “which corresponds to CPI inflation of 2.6% and cumulative inflation of 21% since January 2019.”

Walks the same line Santa Cruz. “They cut interest rates when not enough has been done to reduce the money supply. There was almost no fall in the M3 money supply in the eurozone. For several months last year she fell, but very timidly. aggregates: M1 (banknotes and coins in circulation and demand deposits) and M2 (M1 plus long-term deposits)”, but what is credit, money circulation in the economy is not constrainedtherefore, there cannot be a significant reduction in inflation expectations.”

The economist also remembers the exceptions that the ECB makes regarding the debt of Spain and Italy, which serves to legalize these economies. “No matter how much the balance sheet was reduced because they did not reinvest the debts that they had in the portfolio of almost all countries – except Italy and Spain, where they reinvested until November-December – We are in a situation where inflationary pressures will continue. and we have a very serious problem of controlling it in the medium to long term.

Lacale also believes that “there is no point in cutting rates when the supply of credit has not decreased (in fact, it is increasing) and the demand for credit remains stable. The interannual growth rate of loans to households increases by +0.2%.” According to the ECB, loans to non-financial corporations grew by 3% in April.

The ECB’s decision comes after Eurostat confirmed in May that eurozone GDP avoided recession in the first quarter after recording 0.3% growth, which contrasted with a 0.1% contraction in the final three months of 2023. In this sense, he points out that “The eurozone’s problems do not arise from rising rates. The eurozone was already stagnating with negative nominal rates and in the middle of the Juncker Plan and continues to stagnate in the middle of the Next Generation EU Fund.”