The ECB loads the ammunition against Trump-induced inflation

BrusselsThe European Central Bank (ECB) has been holding its fire for months. It did not want to make a misstep and prematurely use the main tool at its disposal to curb inflation caused by the war in Iran initiated by the United States and Israel. However, the price increase remains upward and is moving further and further away from the goal of keeping it at an annual rate of 2%. For this reason, experts and markets anticipate that the body led by Christine Lagarde has already loaded its ammunition and will raise interest rates by 0.25 percentage points, to 2.25%, at this Thursday's meeting.

The last time the ECB increased the cost of money was also as a consequence of a war, that of Ukraine, which also led to an energy crisis – exacerbated by the euro countries' dependence on Russian fossil fuels – and contributed to a price crisis. Almost three years ago, in September 2023, the Frankfurt-based institution decided to raise rates by a quarter of a percentage point for the last time in the context of the significant increase in the cost of money, which in just over a year went from 0% to 4.5%.

This time the situation is not as serious. At that time, the eurozone countries registered an interannual inflation rate of 10%, while last month it was 3.2% and in April it was 3%. And, for this reason, interest rates are also below what they reached during the months following the start of the war in Ukraine, and at least until now the ECB had avoided raising them. In any case, the interannual percentage increase in prices is one point above the financial institution's long-term target of 2%.

Another difference, however, between the consequences for the eurozone of the war started by Vladimir Putin and the one started by Donald Trump is the economic growth of the countries in the single currency. While at the beginning of the Ukraine conflict the euro area was growing at a good pace, it now sees its gross domestic product (GDP, the indicator that measures the size of an economy) increase timidly: the first quarter of this year it has grown by 0.3% and the last quarter of last year by 1.2%.

Fear of the effects on growth

This combination, that of high inflation and anemic economic growth, causes one of the most feared evils for the ECB: stagflation. And, for this reason, the Frankfurt-based financial entity moves cautiously. It should be remembered that raising the price of money is the financial body's main tool for curbing inflation, but it causes a slowdown in economic activity, as an increase in interest rates makes the cost for banks to borrow money more expensive and, at the same time, banking entities pass this on through more expensive credit by raising the loans they give to their clients. And, naturally, if loans are more expensive, families and companies find it more difficult to request loans from banks to consume or invest, which causes demand to fall and the pace of the economy to slow down.

In this context, beyond the decision of the ECB's governing council this Thursday – on which there is consensus that interest rates will be raised – there is a certain division among experts and financial analysts on which path the banking organization will follow in the future. Some voices point to further increases, while others remain more cautious and do not take it for granted in any case. Be that as it may, Lagarde's press conference this Thursday may provide clues as to what the ECB's next decisions will be regarding the price of money.