The ECB raised the rate as much as it could – Newspaper Kommersant No. 166 (7367) of 09/09/2022

The Board of Governors of the European Central Bank (ECB) on Thursday unanimously raised the key rate by 75 basis points at once, to 1.25% per annum. This is the maximum ever one-time tightening of monetary policy – analysts were waiting for an increase of 50 points. The regulator announced several more rounds of rate increases at the next meetings in order to pay off inflation, which accelerated in the euro area to a record 9.1% in August due to rising energy and food prices as a result of the Russian military operation in Ukraine. The monetary policy of the ECB remains important for Russia, both for its export earnings and for citizens who have spent more than 600 billion rubles on the purchase of foreign currency (mainly euros and largely withdrawn to foreign accounts) in recent months.

“The decisive move is intended to lock in a transition from accommodative monetary policy to levels that will ensure inflation returns to the medium-term target of 2%. At the next meetings, further decisions will be made to raise rates to cool demand and prevent the risk of a further sustained increase in inflation expectations,” ECB President Christine Lagarde said in a statement following the meeting of the regulator’s board. Also, the ECB management promises regular evaluation of its policy depending on new data and inflation forecasts. Price increases are rated as “well above” targets and are said to tend to remain at current levels for a “long period”.

According to the first estimate of Eurostat, inflation in the euro area in August reached a level of 9.1% (the growth of energy and food prices, which dispersed inflation, reached a record 38.3% and 10.6%, respectively).

This factor, as well as excess demand “in certain sectors”, caused by the need to restart the economy after covid restrictions, as well as supply restrictions, maintain upward pressure on inflation – the ECB admits that current records are not limiting, but expects a decrease in the indicator as it is broadcast measures of monetary policy in the economies of the countries of the euro area. Inflation forecasts revised by the ECB – up to 8.1% in 2022 (previous – 6.8%), up to 5.5% in 2023 (3.5%) and 2.3% (2.1%) in 2024 Increased – to 3.9% in 2022, 3.4% in 2023 and 2.3% in 2024 – and estimates of core inflation, cleared of the direct impact of energy and food prices.

“Market indicators show that, although oil prices will continue to decline in the short term, gas prices will remain at an extraordinary level,” the head of the ECB stated.

The post-pandemic recovery in the euro area in the first half of 2022 has already given way to a significant slowdown, which is forecast to stagnate towards the end of 2022 and into the first half of 2023.

Instead of disruptions in supply, the economy is now being slowed down by rising energy prices – according to ECB forecasts, it will slow euro zone GDP growth to 3.1% in 2022 and almost stop it (0.9%) in 2023, while returning to explicit growth – up to 1.9% (which is significantly lower than the pre-war rates) in Europe are expected only in 2024. Speaking about the most pessimistic scenario of the forecast, Christine Lagarde said that it was calculated under the condition of a complete cessation of Russian gas supplies to Europe and the prolongation of the conflict in Ukraine and will result in a 0.9% decline in Eurozone GDP in 2023: “rationing” of energy for industry could cause new supply chain problems in value chains, and a slowdown in the global economy threatens to reduce exports of European goods.

Amid concerns about pro-inflationary pressures, measures to offset the surge in energy prices “will be temporary and focused on the most vulnerable segments of the population” – an alternative approach, according to the ECB, would threaten excessive government spending and debt instability; systemic support measures will be focused on “expanding the growth potential and increasing the resilience” of the euro area economy. Hope for European economies comes from expanding employment (plus 600,000 new jobs in the euro area in the second quarter of 2022) with historically low unemployment (6.6% in July); total hours worked have already risen by 0.6% in the second quarter and surpassed pre-pandemic levels – however, the head of the ECB allowed “some increase” in unemployment.

The weakness of the euro against the dollar remains a separate problem for the European regulator – a high proportion of dollar-denominated contracts for energy supplies adds a conversion component to the growth in energy prices.

On Thursday, ahead of the ECB’s announcement of the new rate, ING bank economists wondered if Christine Lagarde would mention the problem, given the G7 and G20 agreements on market rate setting – but this topic was not raised in the speech of the head of the ECB.

For Russia, the ECB’s monetary policy remains important in several contexts. Firstly, the data of the “mirror” customs statistics of the euro area countries recorded a gradual recovery in supplies to the Russian Federation after the failure in April-May, caused by sanctions and the voluntary refusal of European manufacturers to export many goods to the Russian Federation, and a slowdown in price growth in euros with a strong ruble can support this process by reducing the import of inflation (the EU remains Russia’s largest trading partner). Secondly, the Russian Federation continues to supply Europe with energy, food and fertilizers – and their exporters are interested in strengthening the euro.

Finally, according to the Bank of Russia, in recent months, citizens have become among the largest buyers of the European currency in the Russian Federation: in July, individuals increased their purchases of foreign currency to 237.1 billion rubles, which was a record net purchase volume for this category of participants (despite weakening of the ruble this month by 20%). In general, the wave of active buying of foreign currency by citizens has been going on since the second half of May 2022. As a result, in the second quarter, individuals purchased it for 439 billion rubles. (in peaceful April-June 2021 – by 300 billion rubles), 320 billion rubles. of which were for the euro, only 96 billion rubles – for the dollar, and the yuan for this period was bought for only 16 billion rubles.

Oleg Sapozhkov