What Rates Will Look Like in 2023, the ECB and the Shock Hypothesis: “In Case of Deep Recession”

The cycle of high interest rates is not over yet. The minutes of the last meeting of the European Central Bank show that, in order to reach the inflation target of 2% in the medium term, rates will have to be higher and decisions, as is now known, will be based on the evolution of data. Meanwhile, the October move, which resulted in a 0.75 percentage point rise, “was supported by a large majority of members” as an “appropriate response to the prolonged duration of excessively high inflation and the risk that it could increase prices in the medium term”. pressure”. 42% to 6,707.32 points and Madrid’s Ibex 35 +0.75% to 8,394.09 points.

While it is clear that the central bank is taking a less accommodative stance on monetary policy, there is still work to be done. Isabel Schnabel, member of the ECB’s executive committee, agrees with this: “The data received so far indicate that the room to slow the pace of interest rate adjustments remains limited, even if we are approaching the ‘neutral’ rate estimates ” . highlights during a speech at the Bank of England Observers Conference. An eventual stop in the increases, appears in the minutes, seems possible in the case of a “prolonged and deep recession, which may further curb inflation”, while in the case of a slight recession “the Governing Council should continue to normalize and tighten policy monetary”.

In any case, in the Euro Zone, after a stagnation in the third quarter, despite the expected drop in economic activity for the next two, the scenario “is very different from the one assumed in which the Euro Zone enters a prolonged period of negative growth” and it is also from the downward trend described in the September forecast “since energy prices are much lower than expected”.

Enemy number one remains inflation. “These price pressures are unlikely to dissipate quickly,” warns Schnabel, noting how the current macroeconomic environment remains different from the pre-pandemic environment. There are essentially four reasons: “The excess savings accumulated since the beginning of the pandemic continues to be significant in both nominal and real terms”, then “due to supply constraints, companies in the manufacturing sector continue to have a complete order book with more than five months in arrears”, thirdly, “companies continue to create new jobs and unemployment rates remain at record levels, despite the high risks of a technical recession in winter” and, finally, “There is growing evidence that the pandemic and energy crisis may have more permanent adverse effects on current and future potential generation.”

Source: IL Tempo