ECB president Christine Lagarde
Is inflicting pain on the most vulnerable in society really the way to tackle inflation? ECB president Christine Lagarde believes it is.

Renewed credit support pledged to Portuguese as ECB raises interest rates yet again

PM reiterates he “doesn’t agree with ECB’s monetary policy”

With everyone’s worst fears confirmed, ECB president Christine Lagarde has forged ahead with the only ‘instrument’ her bank seems to have in its arsenal to tackle inflation – which, in its perspective, is not falling fast enough.

The 10th consecutive hike announced this afternoon has raised rates by another 25 basis points, taking them into ‘unprecedented territory’: this is the highest value interest rates have ever had in the eurozone.

Continuing with the mantra that this is ‘the only way’, Ms Lagarde has also insisted that “governments should continue removing measures of support from the economy” – something Portugal’s prime minister has pledged ‘will not happen’.

The government has been waiting for today’s ‘bombshell’ “to review legislation that exists to support families who have mortgages”, he said in Porto last night.

New measures will be announced at the Council of Ministers in seven days time.

As the prime minister reiterated, “I do not agree with the monetary policy of the ECB”. He is definitely not the only one: President Marcelo too has voiced serious concerns about what a new rate increase will mean to already cash-strapped citizens.

But the ECB has remained true to its unpopular path. The statement released today says: “The rate increase today reflects the Governing Council’s assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission. 

“The September ECB staff macroeconomic projections for the euro area see average inflation at 5.6% in 2023, 3.2% in 2024 and 2.1% in 2025. This is an upward revision for 2023 and 2024 and a downward revision for 2025. The upward revision for 2023 and 2024 mainly reflects a higher path for energy prices. Underlying price pressures remain high, even though most indicators have started to ease. 

“ECB staff have slightly revised down the projected path for inflation excluding energy and food, to an average of 5.1% in 2023, 2.9% in 2024 and 2.2% in 2025. The Governing Council’s past interest rate increases continue to be transmitted forcefully. Financing conditions have tightened further and are increasingly dampening demand, which is an important factor in bringing inflation back to target. 

“With the increasing impact of this tightening on domestic demand and the weakening international trade environment, ECB staff have lowered their economic growth projections significantly. They now expect the euro area economy to expand by 0.7% in 2023, 1.0% in 2024 and 1.5% in 2025.

“Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target. For the full statement, read here.

Meantime, Mr Costa’s message to the hundreds of thousands struggling with rising mortgage payments is that “the government will adopt a new law on housing loans so that Portuguese families can have, above all, predictability over the next few years and stability in what they can foresee in terms of the evolution of their instalments. 

“We are all aware that we have lived for almost 20 years with historically and abnormally low interest rates, which have even been negative, and that the future will certainly not be like this. We also know that the medium-term objective we are all committed to is to achieve inflation of 2% and, therefore, the stabilisation of interest rates and housing payments must also bear this benchmark in mind.”

What measures should the government announce?

SIC Notícias believes:

  • Banks could be obliged to convert the variable rate into a fixed rate whenever the customer’s effort with the credit reaches 40 per cent of their net income.
  • Credit subsidies for families could be extended/ reinforced. In July, in an interview with Público, Finance Minister Fernando Medina said that the government was going to extend the support scheme for subsidising housing loans to more families with an effort rate above 50%, as soon as the index exceeds 3%.

All this comes against a background of a government/ president who have both spoken out against the ECB policy, suggesting its strategists have not fully understood “the specific nature of the inflationary cycle”. 

Commentators who specialise in matters financial, like journalist/ writer José Gomes Ferreira, suggest it is much more down to “errors of the past”, like quantitative easing (the policy under former ECB president Mario Draghi who literally opened the doors to printing money over and over… at the time to “save the banks from the financial crisis of 2007 and 2008”).

Mr Gomes’ Ferreira’s opinion of Ms Lagarde’s stance is not a good one, and he reminded his interviewers earlier this summer that she is “an unelected bureaucrat” who has been allowed to decide the future “of 400 million in Europe”.

Today, he has added that it is not just families that are being affected by interest rates: small and medium sized businesses (the bulk of those in Portugal) are also suffering, particularly those that contracted loans during the pandemic.

“During the pandemic, many small and medium sized businesses sought to borrow money as part of the Covid-19 supports offered, and now they have unmanagable rates of interest. There are also many small and medium sized businesses that need help, just like families, who should have stronger instruments to face this reality”.

All eyes, therefore, and expectations will be on the Council of Ministers’ meeting next Thursday.

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