ZEW Economist Friedrich Heinemann on ECB Interest Rate Decision

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12.12.2024

“Continuing Wage-Price Spiral” (December 2024)

Portrait of Prof. Dr. Friedrich Heinemann — Professor Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance”, on the ECB interest rate decision and the European economy.

The ECB Governing Council has decided to lower the deposit facility rate by 0.25 percentage points. Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim and professor at Heidelberg University, has commented on this matter:

“It’s a good thing that the ECB Governing Council has not made a major interest rate decision. Ongoing wage pressure and high inflation in the services sector prove that markets continue experiencing a wage-price spiral. In addition, and more seriously, the risk of imported inflation has increased since the US presidential election. If bilateral tariffs in trade between the US and Europe rise, this will drive import prices. Germany therefore has to anticipate persistent stagflation for the next year, too, i.e. minimal growth in combination with a too-high inflation. It’s now essential for the ECB to signal in its communication to markets that further interest rate cuts can’t be taken for granted.”

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“A Signal to Wage Policy” (September 2023)

The ECB Governing Council has decided on another interest rate hike of 25 basis points. This brings the interest rate for main refinancing operations of the banks to 4.5 per cent. Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim and professor at Heidelberg University, has commented on this matter:

“The persistently high core inflation and the excessively sharp rise in service prices have once again given the advocates of another interest rate hike the upper hand in the ECB Governing Council. This determination in combating inflation is primarily a signal to wage policy: collective bargaining should be able to rely on the return to price stability by no later than 2025, and wages should not require adjustments for future inflation. The ECB is engaging in expectation management with its decisions, and today’s signal is significant and valuable.”

“Allowing the Rate Hike to Take Effect” (July 2023)

The ECB Governing Council has decided on another interest rate hike of 25 basis points. This brings the interest rate for main refinancing operations of the banks to 4.25 per cent. Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim and professor at Heidelberg University, has commented on this matter:

“Calls for an end to interest rate hikes are premature. Unlike in the US, the inflation rate in the eurozone still exceeds the key interest rates. Savers, who are starting to benefit from higher interest rates on savings accounts, are still losing wealth in the current environment. Although the inflation rate is falling, core inflation – excluding energy and food prices – actually rose slightly in June. It would therefore be too early to give the all-clear on inflation at this stage. Nevertheless, it would be justified if the ECB now takes the decision to pause and allow the recent rate hikes to take effect before considering a possible further increase in October. By then, it will be clearer whether tighter monetary policy will finally dampen rising prices in the services sector as well.”

“The ECB Is Currently Doing a Convincing Job” (June 2023)

The ECB Governing Council has decided on another interest rate hike of 25 basis points. This brings the interest rate for main refinancing operations of the banks to 4.0 per cent. Professor Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim, has commented on this matter:

“The ECB is currently doing a convincing job in regaining lost trust. Despite an unfavourable economic outlook, it continues to raise interest rates, demonstrating that the restoration of price stability is a priority. However, some favourable developments in recent months have made this course of action possible. The current Italian government is pursuing a comparatively cautious fiscal policy, preventing Italian government bond yields from spiralling out of control amidst rising ECB interest rates. Furthermore, the Credit Suisse debacle has remained an isolated case within Europe. All these factors provide some temporary leeway for the ECB. Unless core inflation experiences a significant decline, it is realistic to expect at least one more interest rate hike, although resistance within the ECB Governing Council may intensify.”

“ECB Needs More Support from Fiscal Policy” (May 2023)

The ECB Governing Council has announced the seventh interest rate hike since last summer. While previous hikes were 75 and 50 basis points, this time key interest rates increased by only 25 basis points. As a result, the interest rate for banks’ main refinancing operations is now at 3.75 per cent. Professor Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim, shared his views on this development:

“Inflation has proven to be persistent, and today’s small interest rate hike is unlikely to be the end of the current cycle. The ECB’s fiscal policy does not make its task any easier. The EU’s debt-financed spending programmes, as well as the federal and state governments in Germany with their new multi-billion shadow budgets all contribute to persistent inflationary pressures. In addition, the European Commission’s further loosening of debt rules is no good news for monetary policy. The ECB needs more support from fiscal policy to fulfil its commitment to maintaining stability in the foreseeable future.”

“A Typical Conflict of Interests” (March 2023)

The ECB Governing Council has decided to raise its key interest rates again despite the turmoil on global markets following the collapse of Silicon Valley Bank (SVB) and the acute difficulties of Credit Suisse. This is the sixth rate hike since July 2022. As announced, rates were again increased by 50 basis points. The interest rate on the main refinancing operations of banks is now at 3.5 per cent. Professor Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim, has commented on this matter:

“Both the Federal Reserve and the ECB always had to consider that constant interest rate hikes could have negative side effects on financial markets. Still, central banks must not overlook the fact that entrenched inflation poses significant risks to financial stability. This is a typical conflict of interest: the relentless fight against inflation cannot be won without paying a price. This is exactly what the critics of a long-term zero interest rate policy have warned against. The current crises of SVB and Credit Suisse show how much pressure the interest rate hikes are putting on the banking sector. In the event of a full-blown banking crisis, the ECB will have to step away from its rate-hiking cycle. Yet the ECB made the right decision to go through with another major interest rate hike today. Any other decision would have been a sign of panic that would only have led to more uncertainty.”

“ECB Governing Council in the Dark About When to Expect Core Inflation to Fall” (February 2023)

The ECB Governing Council has decided to raise its key interest rates again. This is the fifth rate hike since July 2022. As expected, rates were increased by 50 basis points. The interest rate on the main refinancing operations of banks is now at 3.0 per cent. Professor Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim, has commented on this matter:

“The expected decline in the euro inflation rate in the coming months is the result of no longer rising energy prices and government aid. However, broad inflation dynamics measured by core inflation remain well above the ECB’s inflation target. The Governing Council is currently in the dark as to when a significant decline in core inflation can be expected. Over the past two years, the Council has had to learn how difficult it is to make inflation forecasts for more than a year ahead. Therefore, it is only reasonable that the majority of the ECB Council members want to wait for a significant decline in core inflation before ending interest rate hikes. Only the representatives of Italy and Greece in the ECB Governing Council have spoken out in recent weeks in favour of a wait-and-see approach to interest rates. The fact that it is once again the representatives of highly indebted countries who are advocating this position does not help the ECB to improve its monetary policy reputation. These finance ministers, interested in favourable financing conditions, are obviously trying to get the ECB Governing Council to support their interests.”

“New Inflation Shock If War in the Middle East Escalates” (October 2023)

The ECB Governing Council has decided to keep the interest rate for main refinancing operations of the banks at 4.5 per cent. Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim and professor at Heidelberg University, has commented on this matter:

“The ECB currently has no reason for another interest rate hike. Inflation has veered onto a clear downward path. Interest rate hikes act like a long-term medication whose effect sets in with a considerable time lag. It would therefore be wrong to further increase the dosage now, even though the initial symptoms suggest a gradual recovery. Whether the recovery continues smoothly, however, is uncertain. If the war in the Middle East escalates, the next inflationary supply shock could be imminent.”

“Inflation Figures in January Will Decide on Interest Rate Cut” (December 2023)

The ECB Governing Council has decided to keep the interest rate for main refinancing operations of the banks at 4.5 per cent. Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim and professor at Heidelberg University, has commented on this matter:

“The stock market is already celebrating interest rate cuts that exist only in people’s minds. This interest rate euphoria is inconvenient for the ECB because the expectations of lower key interest rates have already driven down longer-term interest rates on mortgages and corporate loans. But that’s not the desired outcome from the perspective of current monetary policy. It seems paradoxical, but the earlier ECB observers expect interest rate cuts, the longer it might actually take for the first downward move. January’s inflation figures will play a crucial role in shaping opinions. If there is no significant setback in inflation in January, this could pave the way for the first interest rate cut in spring.”

“Price Stability Takes Precedence over Economic Stabilisation” (January 2024)

As expected, the ECB Governing Council has decided to leave key interest rates unchanged. Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim and professor at Heidelberg University, has commented on this matter:

“Since the beginning of the year, the enthusiasm for interest rate cuts in the markets has suffered a significant setback. This is clearly evident in the strong rebound of German Bund yields. The view that interest rates could remain high for an extended period is gaining more supporters once again. The reason for both this shift and the ECB’s caution is the persistent high core inflation. January’s inflation rate will be a crucial figure for the ECB Governing Council’s further deliberations. If inflation takes a significant leap upward as a result of numerous price hikes at the beginning of the year, the timing for a potential interest rate cut will be postponed. Despite the poor economic conditions in the eurozone, which would typically call for a swift interest rate cut, the EU Treaty is clear on such trade-offs: price stability takes precedence over economic stabilisation in the ECB’s objectives.”

“Likelihood of Interest Rate Cut Rises in June Meeting” (March 2024)

As expected, the ECB Governing Council has decided to leave key interest rates unchanged. Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim and professor at Heidelberg University, has commented on this matter:

“With the unexpectedly sharp decline in eurozone inflation and unfavourable economic indicators, the likelihood of an interest rate cut in the June meeting is growing. A prerequisite for this is that the core inflation moves even closer to the two per cent mark. Adjusted for energy and food, inflation is still above three per cent in February. Lower interest rates would not only aid finance ministers in financing their extensive bond issuances, but would also ease the burden on the central banks themselves. The substantial losses at the Bundesbank and ECB result from high-yield bank deposits and low-yield holdings of government bonds. Decreasing key interest rates would help limit these losses. All of this is likely to increase support within the Governing Council for the initiation of a new cycle of interest rate cuts.”

“There’s a Transatlantic Dimension to the Forthcoming ECB Interest Rate Cut Phase” (April 2024)

The ECB Governing Council has decided to keep the interest rate for main refinancing operations of the banks at 4.5 per cent. Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim and professor at Heidelberg University, has commented on this matter:

“It is now almost certain that the ECB will initiate interest rate cuts in June. The question remains as to how much interest rates will decrease this year. What’s important in this regard is the development of inflation in the eurozone, especially core inflation. However, the decisions of the Fed could also play a role. With the US central bank currently struggling with rising inflation, its first interest rate cut may have to be postponed. A widening interest rate gap between the Fed and the ECB could potentially trigger a euro depreciation, reigniting inflation in Europe. Hence, there’s also a transatlantic dimension to the forthcoming ECB interest rate cut phase.”

“The ECB Council Should Avoid Falling into a Communication Trap of Its Own Making” (June 2024)

As expected, the ECB Governing Council has decided to lower the interest rate for main refinancing operations of banks by 0.25 percentage points to 4.25 per cent. Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim and professor at Heidelberg University, has commented on this matter:

“This first rate cut was excellently prepared by the ECB in terms of communication and is well justified from a monetary policy perspective. However, the persistence of inflation has been something of a negative surprise of late. Both wage growth and core inflation are still well above the ECB’s target of two per cent. The ECB Governing Council should now refrain from making premature announcements of further rapid rate cuts. Otherwise, it risks falling into a communication trap of its own making. Additionally, given the increasing debt problems of key eurozone countries and the recent downgrade of France’s credit rating, the ECB must not give the impression that it places greater importance on the affordability of government debt than on price stability. From today’s perspective, one or two more rate cuts are the maximum that can be responsibly implemented this year.”

Contact

Scientific Contact

Prof. Dr. Friedrich Heinemann

Email friedrich.heinemann@zew.de Phone +49 (0)621 1235-149

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