Unlike the Fed, the ECB again raised its key rate on Thursday.
Inflation still too high for the ECB
The key rate is now 4% and a further hike of 0.25% next month is already certain.
Christine Lagarde made it clear that inflation is too high. “We’re not thinking about lowering rates,” she said. It remains ” work “.
Note that the President of the ECB pointed to salary increases. These last “become an increasingly important source of inflation” while energy prices are on the contrary on the decline.
Other non-trivial information, the ECB “will end reinvestments under the asset purchase program (APP) from July 2023”. In other words, the ECB continues to reduce the size of its balance sheet.
The ECB’s balance sheet has fallen from 8,554 billion euros at its peak (2021) to 7,715 billion today:
The last inflation projections have been revised upwards. The ECB expects consumer price inflation to average 5.4% this year, 3.0% next year and 2.2% in 2025. The 2023 forecast is based on on an average oil price of $78 per barrel.
In short, the ECB could leave its rates high until 2025. But note that when asked whether 3% would soon be the new 2% (concerning the ECB’s inflation target), Christine Lagarde kicked in touch:
“We will come back to 2%. What happens next is another story”…
As for GDP growth, the ECB anticipates 0.9% in 2023 then 1.5% in 2024 and 1.6% in 2025. It is hard to see the debt/GDP ratios falling with such starving growth. Especially since the world passed peak oil in November 2018.
High interest rates = explosion of debt service
As we wrote about the Fed Chairman’s conference the day before, rates will come down sooner or later. Inflation will eventually subside.
But don’t expect to see prices drop. Purchasing power is cut off forever. And this to the delight of the States which see their revenues increase. For what ? Because VAT is a fixed rate on everything sold.
Inflation never goes down. It only increases more or less quickly. In France, you have to go back to 1953 to find a year with a drop in prices.
Nothing surprising here. The fiat system is designed to be an inflationary ponzi. But not with inflation of 10%, or even 25% in some European countries. We are getting into the hard.
Information is more difficult to find for Europe than for the United States, but it is obvious that the rise in rates is also causing the interest paid on the debt to explode.
In France, for example, the debt reaches 3,000 billion euros (112% of GDP). Knowing that the public deficit was 172 billion euros in 2022 and public revenue 287 billion… We therefore borrowed the equivalent of 60% of our revenue.
The debt of the euro zone reaches 14,000 billion euros. However, an interest rate of 4% means that debt service (interest) is 560 billion euros per year.
The ponzi will start exponentially if the rates remain at this level for too long. Clearly, the ECB will eventually bring rates down to 0%.
And if inflation remains high, we will continue to disguise the figures (eg substitution of products in the INSEE basket). And if that’s not enough, the ECB’s inflation target will drop from 2% to 4%.
The Bitcoin will thus leave for a turn if the halving has not already taken care of it by then. Our article: Why so much inflation?
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