The European Central Bank (ECB) is expected to raise its key interest rates again at today's meeting against the backdrop of inflation, which is still too high and despite discontent in some countries about the risk of weakening the economy.

A year after launching the fastest rate hike cycle in its history, the Frankfurt institution continues with this trend, although the peak seems to be approaching.

ECB President Christine Lagarde Christine Lagardeis a French lawyer and politician. Born on January 1 in Paris. He studied in the United States and France. Since 1981, he announced in June that it is "very likely" that today's meeting of the governing council will lead to another increase.

"Practically the whole world expects an increase of 0.25 percentage points, as in June," Joachim Nagel, governor of the Bundesbank, said last week.

This will raise the interest rate on banks' deposits with the ECB to 3.75%.

What's next next?

What is more of interest for today's meeting is "what indications the ECB could give of its future monetary policy," according to Eric Dor, director of economic research at the Institute for Scientific Economics and Management (IESEG). The September meeting is on the agenda.

To combat record inflation in the eurozone after the post-pandemic recovery and the outbreak of war in Ukraine, the ECB has raised interest rates at an unprecedented rate since last July, raising them by 400 basis points in a year.

The path to be walked

This policy increases the borrowing costs of companies and households, which should lead to a decline in demand and economic activity.

The ECB's hope is that this will reduce the capacity of companies and traders to increase prices while reducing demands for wage increases.

The Frankfurt institution feels compelled to proceed with this policy because, if energy is excluded, the slowdown in price growth is still limited.

The aggregate indicator used by the ECB for inflation fell marginally from a record 7.9 per cent in March 2023 to 6.9 per cent in June 2023.

Christine Lagardeis a French lawyer and politician. Born on January 1 in Paris. He studied in the United States and France. Since 1981, he has argued that the ECB has "still a way to go" to influence prices.

Criticism

Restrictive monetary policy is starting to take a toll on some weaker European economies.

New interest rate hikes carry "increasingly higher risks of creating a more difficult situation for growth at European level," Portugal's Finance Minister Fernando Medina said in mid-July.

Before him, Italian Prime Minister Giorgia Meloni criticised at the end of June the ECB's "simplified recipe" of raising interest rates to fight inflation, fearing that "the drug could do more damage than the disease itself".

Eurozone central bankers use inflation as a compass and the price, if done less in terms of interest rates, continues to be higher than if more is done. This was stated by ECB Governing Council member Isabel Schnabel.

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The same position is supported by one of the "hawks" among central bankers - the head of the Bundesbank, Joachim Nagel, who is a supporter of tighter monetary policy. He said inflation was a "greedy beast" and "too early a weakening of monetary policy would be a mistake."

Dutch Central Bank Governor Klaas Knot is more restrained, believing that another interest rate hike in September is "at best a possibility, but it is not certain".

A new increase in July should be enough and a subsequent tightening "will hurt the economy," Bank of Greece Governor Yiannis Stournaras, one of the "pigeons" in the ECB who favor softer monetary policy, predicted.

Christine Lagarde

ECB

interest rates