The ECB looks set to tighten into a slow down

by Shaun Richards

Today the focus switches to the Euro area and in particular the ECB. Yesterday we noted the U-Turn by policymaker Isabel Schnabel leading markets to expect a 0.75% interest-rate increase in just over a week. That would mean that the ECB had raised each interest-rate rise ( July and September). by 0.25% compared to its days of providing Forward Guidance. This is in response to the inflation surge although is a year late but raises the issue of what will happen to the economy.

This morning’s monetary data does give us a guide as it was essentially before the July interest-rate rise. So for the very short-term impact we see this.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 6.7% in July from 7.2% in June.

So the short-term monetary push for the economy was falling and in theory this reflects the end of the QE bond buying programmes. The original programme in fact ended in July.

€20 billion of net purchases in June 2022
No net purchases, only reinvestments of redemptions, as of July 2022

As the Pandemic version ( PEPP) ended in March  we see why the rate of growth has fallen from 8.8% in March to 6.7% now. So in terms of the short-term impact on the economy the brakes were on before the initial interest-rate increase.

Looking Ahead

We can do this via the broad money figures.

Annual growth rate of broad monetary aggregate M3 decreased to 5.5% in July 2022 from 5.7% in June

These numbers have performed really well in terms of setting the economic scene for some 18/24 months ahead. From March 2020 the ECB set about raising M3 growth from around 5% to above 12% which means that we would expect in 2022 a large shove higher in nominal ( real growth plus inflation) output. As we have a struggling growth output most of it has turned up in the inflation figures  creating much of the present economic mess. That is why there has been talk of a 0.75% interest-rate rise. This morning’s inflation update shows us how well it has worked as a guide.

Euro area annual inflation is expected to be 9.1% in August 2022, up from 8.9% in July according to a flash
estimate from Eurostat, the statistical office of the European Union.

Of course there has been an influence from the war in Ukraine and the impact on energy prices. But inflation was already on the rise and it is getting more widespread.

Looking at the main components of euro area inflation, energy is expected to have the highest annual rate in August
(38.3%, compared with 39.6% in July), followed by food, alcohol & tobacco (10.6%, compared with 9.8% in July),
non-energy industrial goods (5.0%, compared with 4.5% in July) and services (3.8%, compared with 3.7% in July).

But as we now look ahead from a 5.5% growth rate for M3 we see that the picture ahead is very different and that a fall in inflation is likely via a brake on the economy. The interest-rate rises in July and planned for September will add to the braking effect as we look ahead and there is no current QE. If we look back to the era that preceded the initial QE bond buying we see that broad money growth fell as low as 0.8% and was part of the trigger for its inception.

I am not saying that money supply growth will fall to that level as we do not know policy beyond September. but as the peak post credit crunch was 3.7% we seem set to fall to that sort of level. In which case the outlook for 2024 and into 2025 is not very good. Or the ECB is in danger of lurching from policy which was much too easy into one which is too tight.

Interest Rates

We are primarily funded by readers. Please subscribe and donate to support us!

These were rising long before the ECB raised its official rate in July. It calculates a composite mortgage interest-rate for the Euro area and it was around 1.3% for late last year and early this. But began to rise in February and was 1.94% in June. This month has seen quite a rise in bond yields so it could easily be 2.5% now.  The rise in business lending rates has not been so marked as 1.82% in June replaced around 1.4% before. But the message is that conditions were getting tighter.

One piece of detail that might not have been expected is that Germany at 2.57% in June saw faster rises for mortgage rates whereas France at 1.35% had seen much less.

The Economy

Signs of trouble are emerging in more than a few areas. We can start with energy where Austria is on the bailout road.

The billions in aid for Wien Energie has been fixed. The federal government and the city of Vienna agreed on a credit line of two billion euros on Wednesday morning. ( Der Standard)

So many electricity markets are in disarray as we wonder if the state is bailing out speculation?

In addition, the federal government called for the situation to be clarified, specifically the transactions of Wien Energie and whether there had been adequate risk management. ( Der Standard )

There are all sorts of issues for businesses due to soaring energy costs. From Les Echos about Italy.

Carlo Bonomi, the president of the transalpine employers, warns against the risk of generalized bankruptcies if the prices of energy do not fall. At least 120,000 businesses and 370,000 jobs are at risk over the next six months, he said. Over one year, the retail sector recorded a fivefold increase in its energy bills. They have tripled in restaurants and hotels.

This adds to this from Bloomberg a couple of weeks ago.

Europe’s energy crisis has claimed another victim in the power-hungry metals industry, with planning to shutter an aluminum smelter in Slovakia at the end of next month……… The region had already lost about half of its zinc and aluminum smelting capacity during the past year, mainly as producers dialed back output. Hydro and others are now moving to shut down plants entirely.


The monetary data is suggesting a curious development with inflation where it is. That is that the ECB faces a danger of setting policy too tight after a period of it being too loose. They have got their timing wrong and rather than leaning against economic developments have exacerbated them. There is a particular irony here because this is why central banks were given control of monetary policy to avoid politicians playing to the crowd and acting too late and having to do too much. That has failed and it must be at least partly due to the fact that central bankers and politicians have merged with ECB President Christine Lagarde a cleat example.

It is even possible that the ECB ends up only doing 2 interest-rate rises like it did in 2011 but I suspect the momentum will last a bit longer this time around.

One other matter is the comments section. It has been a success and is a strength of this blog due to the varied debate so thank you to all. I would appreciate it if everyone could concentrate on the economics and avoid politics as we go forwards. Times are about to get very hard and politics will only lead to arguments and trouble.


Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.