“Inflation is increasing in the euro zone, but the ECB is lowering its rates, completely out of sync”

© Alex Kraus/Bloomberg via Getty Images

– Christine Lagarde, President of the European Central Bank (ECB)

Despite the sharp increase in consumer prices in the Euro Zone since last February, the European Central Bank (ECB) has therefore decided to please the financial markets and political leaders of the countries of the Economic and Monetary Union (EMU). ). Indeed, despite an increase in consumer prices of 2.2% in four months, 2.6% over one year and 20% since January 2021, the ECB lowered its key rates by 25 basis points (0 .25 percentage point, Editor’s note), notably reducing its refi rate to 4.25%.

This monetary easing is memorable for at least three reasons. Firstly, this is the first reduction in the ECB’s key interest rates since March 10, 2016 (at the time the refi rate had been reduced from 0.05% to 0%) and the largest ( 25 basis points) since April 23, 2014. Second, this decision appears in opposition to economic statistics. On the one hand, because, as we specified above, inflation is starting to rise again and therefore remains well above the ECB’s inflation target set at 2%. On the other hand, because the latest leading indicators of growth (and in particular those of purchasing managers) show that the latter is improving.

The ECB was already out of step with the reality of inflation in 2022

This gap between economic reality and the decisions of the ECB was already glaring in 2022. At the time, inflation in the Euro Zone was exploding, but the ECB continued to defend that this inflation was temporary, that it would sharply and quickly fall and that, as a result, it was not justified to raise the refi rate which was nevertheless 0%. We finally had to wait for inflation to reach 8.7% in June 2022 for the ECB to finally decide to act by raising the refi rate by 50 basis points (0.5 percentage points) on the 21st. July 2022.

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Given this error of judgment and this dramatic delay, inflation then increased to 10.6% in October 2022, forcing the ECB to increase its key rates more and more sharply. However, inflation had become uncontrollable, making the ECB’s actions completely ineffective, even counterproductive. Hence an essential question: Why such an error? Bad analysis? Amateurism? Willingness not to raise interest rates before the French presidential and legislative elections? All three at once? Still, faced with the decision of June 6, 2024, the same questions arise, with an underlying question: what link is there between this unjustified monetary easing and the European elections of June 9, 2024?

“The ECB is less and less credible”

Hence our Tertio. In this case, the worsening of the weak credibility of the ECB. Because, let’s be realistic: the strength of a Central Bank lies more in its credibility and the confidence it inspires than in its monetary policy decisions. Furthermore, let us not forget that politics and the rise in stock markets are not part of the objectives of the ECB, which must above all fight against inflation. However, after refusing to see the reality of inflation in 2022 and to react accordingly, the ECB is once again hiding its face, by covering the risks of lastingly high inflation.

France has once again become the red lantern of the world economy

The worst is that this 0.25 percentage point reduction in the ECB’s refi rate will not change the face of the Euro Zone economy, which will remain moribund for a long time. And this, in particular in France, which, in terms of purchasing managers’ indices (PMI), has once again become the red lantern of the world economy. Worse, it is even the only country in a recession zone, with a composite PMI index (that is to say all sectors of activity) of 48.9 in May. A level which shows that French GDP could decline significantly over the entire second quarter of 2024.

France’s public finances remain adrift

Even more worrying, the French state deficit continued to widen in April 2024. From January to April 2024, it reached 91.56 billion euros, or 7.9 billion euros more than in 2023 and only 500 million euros less than its historic record of 2020. Over twelve months, the shower is even colder, with a State deficit of 181.11 billion euros, or 13.25 billion euros more than in April 2023 and 3.74 billion more than the previous record of 2021.

Despite the ECB’s rate cut, France’s long-term rate is not falling, on the contrary

Enough to confirm that the downgrading of France’s sovereign rating by S&P on May 31, 2024 is not only deserved, but above all that it calls for many others… Which will not fail to give rise to new tensions on bond rates. interest on French State bonds. It is also clear that despite the reduction in the ECB’s refi rate, the interest rate on the 10-year OAT has also started to rise again, approaching 3.1%.

Marc Touati, economist, president of the ACDEFI firm, author of 8 economic best sellers, including RESET II – Welcome to the world after, released in September 2022

You can also find his video chronicles on his YouTube channel, which has more than 151,200 subscribers, including the latest: “Deficits, Rating, Inflation, Real Estate: serial disasters!”