By Tasos Dasopoulos
The continuation of tension in the Persian Gulf and the exclusion of the Strait of Ormuz raises difficult questions to the Governing Council of the European Central Bank which should decide on the next day of monetary policy at its meeting on 9 and 10 September.
The main dilemma of ECB staff is whether and when euro interest rates should be increased for the second time. The bank's chief economist, Philip Lane appreciated in interview he gave on Tuesday, that inflation in the Eurozone will peak at 3% where it stays until the end of the year. However, when he accepted the question whether the September meeting would lead to the second increase in interest rates by 25 basis points – as the markets have forecast – he avoided answering directly. He specifically said that the ECB would do what it had to do to 'blow' inflation.
It is noted that since the start of the US and Israel war with Iran, after the increase in energy prices, the message given by the ECB was that this time it will not be long before it reacts to a sharp rise in inflation, as happened in 2022, with Russia's invasion of Ukraine.
The second increase in interest rates will not be easy. Everyone rushed to declare their satisfaction with the resilience of the EU economy. which developed at a rate of 0.4% in the second quarter of the year but along with the positive development came the bad news about debt. The EU's vulnerability to energy crises, since Europe lacks energy efficiency, led markets to attack European debt. The budgetary problems of France and Italy yesterday brought the yields of the ten-year bonds of the second and third EU economies. marginally over 4%. Germany, which is now borrowing from the markets at an interest rate of 3.25%, did not escape the attack. This, while five years ago the Eurozone's largest economy was borrowing at negative interest rates.
New increase or waiting stop
A new increase in ECB interest rates, even by 25 basis points, will leave its footprint on the yields of the bonds that will be further strengthened. Increasing the cost of money can be the right recipe to reduce demand and reduce inflation. However, with Europe's major economies struggling to have a positive impact on their economic growth this year, an increase in interest rates can lead to stagnation or even recession if we have yet another peak in conflicts in the Persian Gulf.
All this while everyone expects a difficult autumn for the EU. due to the difficulty of replenishing gas reserves in the winter, which will increase pressure on European debt.
Although members of the Board are still on their summer vacation, their return to Frankfurt is expected to be difficult. Especially if the ECB wants to remain aggressive against increasing inflation. On the other hand, markets expect one to two interest rate increases over time, while in the EU. There are more and more people who don't want any increases.
