The European Central Bank (ECB) raised its interest rates today by 0.25 percentage points, taking further steps to tighten monetary policy in an already unprecedented cycle.
The mantra repeated within the Governing Council is that ‘the costs of doing too little continue to be greater than the costs of doing too much’, but we can only disagree with such a point of view. It is puzzling.
The truth is that the euro area has just experienced two consecutive quarters of negative growth, raising concerns about the current economic scenario. Moreover, the Bank Lending Survey highlights tightening levels by banks not witnessed since the last major crises.
Considering it takes a long time for rising interest rates to affect the rest of the economy, the ECB should adopt a prudent wait-and-see approach to evaluate the effects of the implemented tightening measures. Instead of proceeding with further rate hikes, which would only take full effect in two years, we urge the ECB to closely monitor the impact of its current actions on the economy.
With falling energy costs leading to broader price decreases, hiking rates amidst a deflationary cycle could have severe implications.