Households and businesses across the 20-nation eurozone now face a clear signal: borrowing is about to get more expensive, and stay that way for years. Two of the European Central Bank’s most influential policy hawks went public Tuesday with predictions that interest rates must climb still higher. The message lands just days after the ECB raised its benchmark rate by half a percentage point, to 3.5%.
Belgium’s Pierre Wunsch and Austria’s Robert Holzmann both told domestic media the fight against inflation is far from over. Their remarks backed similar statements from their Slovak and Lithuanian colleagues from the day before.
Inflation across the currency bloc sits at 8.5%. The ECB’s own forecasts, published last Thursday, show it staying above the 2% target through 2025. Those forecasts were prepared before this week’s selloff in bank stocks.
Since then, two U.S. lenders have failed and Credit Suisse Group has run into fresh trouble. The ECB acknowledged the outlook has grown more uncertain.
Yet the hawks are not backing off. “I do anticipate a few more interest rate increases,” Holzmann told ORF 1 radio in Austria. He added the size of future hikes would depend on the data.
Since last July, the ECB has already raised rates by 350 basis points. Holzmann, when asked how high the benchmark rate might go, said, “Some of us are hoping it will stay below 4%. It will p” — his sentence was cut off in the original report.
Wunsch, speaking to the Belgian newspaper L’Echo, was blunt. “We know that we need to do more of this.
At what level? That is unclear. Meeting by meeting will take place.” The practical consequences are immediate.
Mortgage rates across Germany, France, Italy and Spain will rise further. Corporate loans, already more expensive, will tighten access to capital for small and medium-sized businesses.
Consumers who have watched grocery bills climb for a year now face higher credit card and car loan payments. The central bank’s own projections show inflation stubbornly lodged above target for two more years. That means the current tightening cycle may not peak until well into 2024.
Each quarter-point or half-point hike adds pressure to an economy that grew just 0.1% in the final three months of 2022. The banking turmoil complicates the picture. When lenders fail, credit conditions tighten on their own.
The ECB’s rate-setters must now judge whether the recent bank stress will do some of their work for them — slowing the economy and cooling prices — or whether it will trigger a full-blown credit crunch that overshoots the mark. Holzmann and Wunsch appear to be betting that inflation remains the greater threat.
They are not alone. Markets are pricing in at least one more half-point increase at the next policy meeting in May. A quarter-point move in June is also seen as likely.
The path ahead carries real risk. Raise too much, and the economy tips into recession.
Raise too little, and inflation entrenches itself in wages and expectations, forcing even steeper hikes later. The ECB’s hawks have made their choice: they will err on the side of tightening. For a family in Madrid, a bakery owner in Berlin, or a factory manager in Milan, the message is plain.
The era of cheap money is over. The bills are coming due.
