"It is no longer enough to speak, we must act," said Isabel Schnabel, the voice of Germany in the executive committee of the European Central Bank (ECB), this week. in an interview replicated on the institution's website. His words are the unfolding of the wings of the hawk most feared by the most over-indebted eurozone countries. Yes, Italy and Spain. And also a threat to lending in general, to households' ability to consume and for economic growth.
When he says act, he means raising official interest rates as early as July to make credit more expensive and stop fueling inflation. And when the specialized press sees a hawk in his tone, it must be understood that he is adopting an orthodox, rigid position in terms of monetary policy: under which the priority is price control, whoever falls.
Among the hawks of the ECB are the majority of representatives of the countries of central and northern Europe, the most disciplined in fiscal terms, which from the debt crisis of 2010 onwards have reluctantly swallowed with extraordinary measures to lower the cost of the loans. A policy that first allowed the recovery of the financial crisis of the most affected economies and that, later, has done the same with the exit of the pandemic.
Spain, the rest of the countries that share the euro and also companies and families have been able to borrow during this time in extraordinary conditions, the best in history, which has made it possible to revive economic activity in the worst of times and deal with spending necessary public to, for example, finance the ERTE from 2020 or the recent Shock Plan for the invasion of Ukraine by Russia.
But precisely the war and its impact on international energy prices have triggered inflation, whose control of around 2% is the main mandate of the ECB, even at the cost of economic growth or employment in the last instance. And if for months the institution has treated the rise in prices with patience, as a temporary and exogenous shock, in recent weeks it has begun a process of withdrawing stimuli, defended as gradual but which is picking up speed at times, and increases the risk to be traumatic.
"From the current perspective, in my opinion, a rate hike in July is possible. Of course, we have to wait and see how the data evolves until the moment of the decision. In any case, the first interest rate hike will not will take place until after the net asset purchases are finished; we have committed to that," Schnabel explains in the interview.
The "net asset purchases" are the bond purchase programs of countries and companies through which the ECB has introduced billions of euros in the financial markets and has guaranteed the demand for debt, even in the days of greatest uncertainty of the pandemic, reducing risks and interests. With "net" it means that as of July no new purchases will be made, but the institution will reinvest the maturities of all the bonds that it has been accumulating in its balance.
Along with the German, another ECB hawk with tradition has spoken in recent days. Olli Rehn, who was EU Commissioner for the Economy when Spain requested its bailout from the European Commission and current Governor of the Bank of Finland, assured that "there is no need to delay" the adjustment of monetary policy, and pointed to July for the first rise in official interest rates, the reference price at which banks lend money and which is transferred to other loans.
This expectation is already being discounted in the markets, the interest required on the 10-year Spanish bond exceeded 2% this week for the first time in six years, and in indices such as the Euribor. The main reference with respect to which the interest rate on loans to purchase homes is set reached 0.013% in April, from -0.5% in December, its historical minimum. this escalation automatically makes mortgages more expensive at a variable rate that have been reviewed or those that are being signed at the moment, also at a fixed rate.
The Governing Council of the ECB is scheduled to meet to discuss its monetary policy on June 9, when it will also publish its new macroeconomic projections, after which it will meet once again before the summer holidays, on July 21, so as not to return until September 8, 2022, with the update of its forecasts.
In recent weeks, voices have multiplied (Schnabel, Rehn and more) within this decision-making body (which brings together the executive committee and the governors of all the central banks in the eurozone) that leave open the possibility of a first rise in interest rates in July, after the vice president of the institution, Luis de Guindos, and the president, Christine Lagarde, recognized that it was possible, although they stressed that everything will depend on the evolution of the data and, therefore, it could be adopted later.
They would be the referees of the confrontation between the hawks and the doves, which is what the most flexible positions are called. Pigeons are more lax about over-indebtedness, and more in favor of keeping stimulus or withdrawing it more slowly to avoid stifling economic growthand families.
Among these pigeons, there is inevitably the Italian governor Fabio Panetta. "We must be prudent, recognizing what we can do, but also what we cannot do," he said in another interview collected by the ECB.
“We have limited room to cool imported inflation,” continues Panetta, who insists that “we must continue to rely on the data. It would be unwise to act without fully understanding how the war and global factors will affect inflation, demand and production. The uncertainty is huge."
The governor of the Bank of Spain, Pablo Hernández de Cos, agrees with the hawks: "Looking ahead, monetary policy decisions will depend on the new data and, given the high level of uncertainty, they will maintain flexibility, gradualism and optionality". And even De Guindos could say that he assumes his status as a Spaniard despite his vice-presidency: "The markets may be discounting a series of rate hikes, but in the Governing Council the data moves us."
"We have not discussed a predetermined path for rate hikes. Until now, we have not seen anything that puts our medium-term objective of 2% at risk. But we have to be very vigilant," explained the former Minister of Economy in the Government of the People's Party (PP).
The pressure from the hawks is very strong, and their main defense is that financing conditions will continue to be very good even if interest rates rise. An increase in the cost of credit that, in addition, has already begun in the United Kingdom, the Bank of England, and in the United States, the Federal Reserve (Fed).
Reducing the question to Spain, last week the Government cut its growth estimate for 2022 to 4.3% from 7% previously. The combination of less dynamism of the Gross Domestic Product (GDP) and the need for greater spending to respond to the new crisis implies that over-indebtedness is going to become chronic in the medium term. If in the 2020 recession due to COVID, public debt reached 120% of GDP, from 95.5% in 2019, in 2023 it will remain close to 116%according to the International Monetary Fund (IMF).
A slab for the state accounts whose annual cost, however, should not be a problem. It could even be seen as an opportunity if the forecast that the Government itself sent last Friday to the European Commission in the 2022-2025 Stability Program is accepted.
In the document, the Executive calculates that interest payments on the debt will remain close to 2% of GDP over the next few years, despite the over-indebtedness and despite the general rise in interest rates.
Spain paid 26,805 million euros in interest in 2021, 2.15% of GDP. And in 2020 the bill was 25,237 million, a minimum since 2010 (see graph). In 2013, after the bank bailout the previous summer, spending on debt interest was close to 37,000 million, 3.7% of GDP.
Since then, the ECB's monetary policy of official interest rates at 0% and large injections of money, along with relief funds and recovery grantshave made that serious debt crisis in the eurozone – Portugal, Ireland, Greece and Spain were grouped under the acronym Pigs (pigs, in English) – just a bad memory.
In the same Stability Program 2022-2025, the Government simulates the impact of a rise in interest rates on different economic indicators, "with respect to the base scenario", which starts from a rate of 2% on the reference bond. According to the calculation (in the graph), an increase of 120 basis points, from the current 2% to 3.2%, at 30 integers per quarter for a year, would mean a hit to GDP of 0.6 points in that year.
The deficit, public revenue (up to 2.2 integers in the year of the rate hike), employment and private consumption, which already in the first quarter of this year It has been the biggest brake on economic recovery.
Household spending suffered a contraction of 3.7% between January and March compared to the fourth quarter of 2021, according to the detail of the advanced GDP data published this Friday by the National Institute of Statistics (INE). Consumption was hit first by the omicron variant of COVID, and then by the impact of the invasion that Russia began at the end of February and by the stoppage of the road transport sector around the same time.