The ECB’s Governing Council yesterday decided to raise the three key ECB interest rates by 75 basis points, the biggest rise since 1999.
Bearing in mind the current rise in inflation is driven by supply-side issues, such as the rise in energy and food prices, following the Russian war in Ukraine and speculation, undue increases in profit margins , and supply-side bottlenecks due to the pandemic, such a move is misguided.
The ECB is seeking to slow economic growth towards stagnation, as if the issue at stake was a demand issue. Such a move, in ECB’s own words, in a “weakening global demand” environment, “is likely to lead to some increase in the unemployment rate.”
The ETUC cannot accept workers will pay for the whole increase in prices. Wages were already failing to keep up with productivity increases are clearly not enough to compensate the loss in workers’ purchasing power. Real negotiated wages in 2022 have dropped 6.5 percent on average in the Eurozone. This is inacceptable.
Will the increase in interest rates lead to more oil, lower prices of oil, more food, lower price of food? Nobel prize-winning economic Joseph Stiglitz says “clearly not”. On the contrary, the EU needs large investment to cope with supply side-issues, for the socio-ecological transformation of our economies and to regain its sovereignty. The increase in rates will prevent such urgent and large-scale investments and is therefore an impediment to the economic, social, and ecological wellbeing of future generations.
Finally, large companies will use the expected increases in interest rates to further increase their unit margins which will add to inflationary pressure. Rents will increase following a shift from buying real estate to rental and from the continued increase in inflation since rental contracts are indexed to inflation.
At best, ECB’s decision, since it “does not target any kind of exchange rate for the euro”, could impact some imported goods’ prices, but the ECB does not know yet “how much exactly it contributed to the inflation as it stands”.
The ETUC asks in what respects rates hikes will positively impact the current drivers of inflation? It will not, it will make the situation worse for workers and citizens and be deleterious to future economic development.