Trade union confederation warns ECB against further interest rate hikes – “Collateral damage would be enormous”

ECB headquarters in Frankfurt

The central bank will discuss a further interest rate hike on Thursday.

(Photo: dpa)

Frankfurt Before the Council meeting of the European Central Bank (ECB) on Thursday, the German Trade Union Confederation (DGB) is calling on the central bank to refrain from further interest rate hikes. “We warn against raising the key interest rate again,” said DGB board member Stefan Körzell to the Handelsblatt. “The collateral damage of further monetary tightening would be enormous.”

In the run-up to the council meeting, the central bank signaled an increase in the key interest rate by 50 basis points. Most pundits expect it to hold on despite the turmoil following the Silicon Valley Bank collapse. Frederik Ducrozet, economist at Swiss asset manager Pictet, still thinks this is likely.

ECB President Christine Lagarde had said that the central bank would only deviate from the plans in extreme cases. “The risk of the ECB raising interest rates by 25 basis points is low as that would send a bad signal to the market,” Ducrozet believes.

DGB board member Körzell is skeptical about this. “The ECB underestimates the harmful effects of the high key interest rate on the economy.” The effects are already clearly being felt. “The interest rate hammer has already hit the construction industry.” Körzell pointed out that housing loans were already collapsing.

Lending has also slowed in other sectors. In addition, the refinancing costs for public budgets would increase. “A decline in investment activity is foreseeable, which will have negative effects on the economy, climate and jobs in the short and long term.”

Körzell also rejected warnings of higher wage increases. “The most recent wage settlements by the trade unions in Germany are good, but they do not endanger the price stability goal of the ECB.”

So far, no second-round effects have been discernible in the euro zone either. ECB President Christine Lagarde recently also emphasized that the central bank has so far seen no signs of a wage-price spiral, i.e. a situation in which higher wages and prices are driving each other up. However, she made it clear that the central bank is keeping a very close eye on wage developments.

Possible support for the banking sector

It is not only from the union side that the ECB is being asked to be more cautious when it comes to further interest rate hikes. Former ECB Executive Board member Lorenzo Bini Smaghi also spoke out in favor of a change in the central bank’s rate hike plans. “A shift of a month or just 25 basis points would not be a problem if it was explained well,” he told the “Börsen-Zeitung”.

However, the ECB could also respond to the recent turbulence by supporting the banking sector. Pictet economist Ducrozet believes it is possible that she will say what means she can use to ensure that banks have sufficient access to liquidity.

For example, security requirements for refinancing operations could be relaxed. The economist at the French investment bank Natixis, Dirk Schumacher, at least expects that central bank chief Lagarde will emphasize “that all instruments can be used if necessary”.

More: “Will contain the wider consequences of the collapse” – How things will continue after the SVB bankruptcy

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