Eurozone Looks Determined…


As expected, the ECB once again hiked rates by 75 bps. Under this new rise, deposit interest rate became 1.5%, and the refinancing rate 2.0%, thus reaching the highest levels of the past ten years.

Speaking at the press conference, ECB President Christine Lagarde said that inflation remains far too high and will stay above the ECB’s target for an extended period, underlining that there is a high probability of further rate hikes. Lagarde added that, “We are going to decide the future path and pace of our rate increases on the basis of the data that we have, and we will do so meeting-by-meeting.”

The ECB President stated that, in view of the unexpected and extraordinary rise in inflation, the Governing Council also decided to change the terms and conditions of the third series of targeted longer-term refinancing operations (TLTRO III), stressing that these operations need to be recalibrated to ensure that it is consistent with the broader monetary policy normalisation process. This goes to show that while gradually reducing the amount of money, the ECB is trying to increase the cost.

Inflation in the Eurozone was 10% last month, quite above the expectations. Although this is a supply-driven type of inflation, I should say that Europe is trying to prevent the deterioration in price behaviour by killing the demand.

Christine Lagarde expects to raise interest rates further to ensure the timely return of inflation to their medium-term target. She has also stated that the changes to the terms and conditions of the ECB’s targeted longer-term refinancing operations will also contribute to the ongoing policy normalisation process. That seems like a polite way of saying “no more free money” to me.

“Confusing Words Do Not Hide the Truth.”

Lagarde said that risks to the economic growth outlook are clearly on the downside, while the risks to the inflation outlook are primarily on the upside, by which she actually meant “economy will slow down while inflation will rise”. Central Bank Presidents often try to making the problem seem smaller than it actually is by talking about profitability, but under the circumstances, the problem will definitely not get smaller.

Lagarde also had bad news: ” Economic activity in the euro area is likely to have slowed significantly in the third quarter of the year, and we expect a further weakening in the remainder of this year and the beginning of next year.”

She also explained that the ECB has not yet finished the normalisation of its monetary policy and the future path and pace of rate increases will be decided on the basis of the available data.

What we may draw from this monetary policy statement is that rate hikes do not improve inflation behaviour in the short term and recession will be inevitable. The ECB will try to stop the market and will do so based on the incoming data, while continuing to increase rates. So the ECB does not intend to hike rates at frequent intervals, it just wants to hike rates enough and in a timely manner.

So, the Eurozone will soon face a big problem and we, as Türkiye, must take the necessary precautions to avoid encountering such crisis ourselves. It is imperative to provide a new solution to exporters who are left unprotected, in terms of the presence of both financial and foreign currency assets, due to the recent rules issued by the Central Bank and the Banking Regulation and Supervision Agency. Otherwise, it will be quite challenging to keep the exchange rates at their current level despite the intense sales from the reserves.