“Whilst the Fed is leaving its key interest rates unchanged, the ECB is keeping the deposit rate at 2.5 per cent. In our view, this is the right decision. It is true that inflationary pressure remains high. The inflation rate in the euro area now stands at 3.8 per cent and is likely to rise further. However, the surge in prices is predominantly driven by energy prices. No serious second-round effects are apparent as yet. Whilst short-term inflation expectations are rising, longer-term expectations remain largely stable.
At the same time, the European economy is losing momentum. Growth prospects are clouding over, whilst the significant rise in capital market interest rates is already making financing conditions considerably tighter. The capital market is thus taking on a significant share of the monetary policy tightening. This is likely to dampen economic activity and, in the medium term, inflationary pressures as well.
Many economists expect the next – and presumably final – interest rate hike to take place in December. We expressly do not share this view. In our opinion, it underestimates the monetary policy tightening already in effect and the mounting economic risks.
France deserves particular attention. Rising risk premiums are increasing the pressure on the ECB to ensure monetary policy transmission. For the time being, these are primarily country-specific tensions. Should the situation escalate, however, unconventional measures may become necessary – initially verbal interventions, liquidity support or a slowdown in balance sheet reduction. The Transmission Protection Instrument would remain the last resort."
