First the prime minister of Finland Sanna Marin (sd.), then President of France Emmanuel Macron and most recently, on Tuesday, the new Prime Minister of Italy Giorgia Meloni.
This trio of EU leaders has been critical of the central bank’s actions recently.
The ECB Council of the European Central Bank will meet on Thursday in Frankfurt for its monetary policy meeting. How the general manager Christine Lagarde answers to the leaders, it will be seen at the press conference in the afternoon at 3:45 p.m.
Marin caused a social storm after tweeting a quote a couple of weeks ago that central banks are only protecting their credibility and driving economies into recession.
Macron chose his words in an interview with a financial magazine a little more precisely:
– I am concerned when I see many European monetary policy experts and some operators explaining to us that demand should be broken in order to curb inflation. One must be very careful, Macron replied of Les Echos magazine (you will switch to another service) to the reporter’s question.
Perhaps the harshest criticism of the central bank’s monetary policy was thrown Italian Meloni (you will switch to another service). In his first speech to the Italian parliament on Tuesday, he said:
– Many consider raising loan costs an ill-considered choice that makes it difficult for families and companies to manage bank loans.
Meloni also considered the ECB’s decision to start withdrawing from subsidized purchases of bonds – in practice government bonds – to be ill-advised.
The central bank is independent
The leaders’ criticism has attracted a lot of attention, because political decision-makers have not usually intervened in monetary policy. Instead, Eurocritics have tried to undermine the ECB’s independence in recent years through the Constitutional Court in Germany.
The main area of responsibility of political decision-makers in the economy is state budgets, through which they can also influence inflation, i.e. the rise in consumer prices. The Central Bank’s account has already been assigned monetary policy and especially the maintenance of price stability In the Maastricht Treaty (you switch to another service) 1992.
The weakness of the Eurozone is that the member countries do not coordinate their finances sufficiently, and the counterpart of the ECB is not a single central government, unlike, for example, in the United States.
Recently, pressure from politicians has been seen as widely as it is now in the early years of the euro (you switch to another service). The then Prime Minister Paavo Lipponen (sd.) joined the chorus of social democratic leaders in demanding that the ECB lower the key interest rate.
However, the central bank has no obligation to act according to the demands of politicians, because according to its mandate, it is obliged to make independent decisions. With the independence of monetary policy, it was specifically intended to prevent politicians from interfering in monetary policy.
It is clear that central bankers still talk to the decision-makers of their home countries and take their views into account at some level. President of the ECB Christine Lagarde participates in EU leaders’ summits and regularly attends the European Parliament’s consultation on the bank’s monetary policy.
One of the reasons why Marin, Macron and Meloni are worried is probably the heavy indebtedness of the states – that is, the area for which they themselves are responsible. When the debt in each country is clearly more now than before the corona pandemic, even small interest rate increases have big effects.
The interest rate differences between loans in Finland, France and Italy in relation to Germany, which is considered the safest loan client, have grown in recent weeks.
Will the deposit rate rise to 1.5 percent?
Central bankers will meet on Thursday in Frankfurt to decide on new monetary policy measures. The ECB Council is the bank’s highest decision-making body, where Finland is represented by the Governor of the Bank of Finland Olli Rehn.
Markets and economists, for example in Bloomberg’s economist surveys, believe that the ECB will raise key interest rates. The deposit rate would now increase by an additional 0.75 percentage points. It would double the interest rate, as the ECB raised the interest rate by the same amount at its last meeting in early September.
Thus, the deposit rate would be at 1.5 percent, i.e. the highest since January 2009.
The ECB’s interest rate hikes are also felt in the wallets of mortgage borrowers. Expectations of the rise in the price of money have already been transferred to the reference interest rates of loans.
The most common reference interest rate, i.e. the 12-month Euribor, has been on an exceptionally high rise recently. It is approaching three percent.
Put a brake on government indebtedness
The ECB will probably start to put the brakes on its monetary stimulus for another season as well.
It started generously supporting the debts of governments and companies in 2014 by buying their bonds and crediting them. At the beginning of the corona pandemic, purchases were accelerated.
Over the years, the ECB’s balance sheet has quadrupled to 8.8 thousand billion euros. Just eight years ago, the balance was 2.2 thousand billion. In practice, that is how much the eurozone has been in debt during the same period.
Inflation has already accelerated to 9.9 percent in the euro area. Consumer prices will therefore rise five times faster than the ECB’s target, i.e. about two percent faster.
– The next six months will be difficult for the ECB. Trade-offs between inflation, economic growth and financial stability may become more difficult to manage, Barclays Bank’s chief European economist Silvia Ardagna says In the Financial Times magazine (you will switch to another service).
You can discuss the topic on 28.10. until 11 p.m.
More on the subject:
Declaration of war on the EU legal order from Germany – “The Central Bank will remain independent in the future as well”, assures Bank of Finland Governor Olli Rehn
Bank of Finland’s Olli Rehn: The EU must get its ranks in order in the energy crisis – the spiral of inflation would lead to brutal unemployment figures
The ECB raised its key interest rate to a record high, the assessment of the economic outlook darkened – This is how the Governor justifies decisions
The ECB raised interest rates more than expected, i.e. by 0.5 percentage points