ECB faces three meetings at 4.25% rates before year-end

Rates at 4.25% and three meetings: how far can the ECB go?

Europe has interest rates one point below the rest of the developed West, yet it suffers the highest inflation and lowest growth, according to the debate. This paradox is the starting point: the ECB meets again with money priced at 4.25% and only three appointments left before 2023 ends. The question is no longer if there will be a hike, but how much margin remains before the medicine kills the patient.

The Independent Authority for Fiscal Responsibility (AIReF), Spain’s fiscal watchdog, no longer hides, according to one participant, the stagnation in Q3, while Q4 looks likely to contract. With this outlook, some argue a quarter-point hike is trivial and Europe should move toward 5% to "legitimize the euro" against stagflation. On the other side, the cautious view warns that continuing to tighten, with mortgages soaring and companies suffocating, turns a slowdown into something far worse.

How much room is left for rate hikes?

The circulating ranges are wide, all stemming from the same data: 4.25% falls short for those looking at the gap with the United States. The most aggressive scenario places the ceiling at 5.25% and does not rule out hikes even in recessionary territory; if a new geopolitical spark appears, the figure jumps to 6% as the economy contracts. An intermediate step, repeatedly mentioned, points to 5% as the minimum target to align the euro with the rest of the West.

On the opposite side, the most common bet is a single move of 0.25 percentage points. The logic is not economic but almost domestic: September is a bad month for drastic decisions and October looms. There is also a third path, minority but firm, which directly rules out a hike because politics weighs more than technicals. For those who see no further room, 4.5% appears as the cycle's ceiling.

Stagflation now acknowledged by the ECB

The shift in the official narrative is the most relevant development in recent weeks. At a press conference, according to the debate, the ECB president admitted that Europe has entered stagflation and hinted that in such a scenario, everything other than controlling inflation becomes secondary. For those who warned that rates were arriving late, this recognition confirms the institution is behind the curve, not ahead of it.

The nuance matters: acknowledging the diagnosis is not the same as getting the remedy right. Those playing the apocalyptic card recall that empires sustain themselves by cooking the books longer than logic suggests, and that the ECB has promised firmness for months while each meeting is decided on the edge. Credibility, in monetary policy, is an asset that gets spent.

Why raising rates doesn't attack the cause of inflation

Here lies the technical core of the issue. The classic recipe—making money expensive to cool demand—works when the problem is overconsumption. Several participants defend a different diagnosis: the engine of prices is energy, which propagates through the entire production and logistics chain to the end customer. Raising rates does not make a megawatt or a barrel cheaper. When the energy bill spikes again, the process restarts.

Germany illustrates this, according to one participant, without shame: federal aid exceeding €20 billion to mitigate energy prices, while taxes levied on them remain intact. The state collects and distributes, inflation does not recede, and the taxpayer pays twice. With this design, every rate hike is extra effort on an economy that is not sick from demand.

Mortgages, SMEs, and the burden of expensive credit

The cost is distributed unevenly. Financing becomes more expensive for individuals and small businesses, while large groups with market access weather the storm. The recurring criticism is that it squeezes mortgage holders and freelancers while protecting systemic players through the back door. The lesson of 2006-2008 repeats with irony: the richest will not be those who have the most, but those who owe the least.

Across the Atlantic, some consider the warning tangible: credit card delinquency and the fall of small banks due to defaults feed the idea that the cycle first tightens at the base of the pyramid. It is not bonds, they argue, but the daily reality of families that begins to fail.

The Fed sets the pace and Europe trinc

The other weighty argument is synchronization. The US grows at a good pace and its central bank maintains pressure; if Europe falls behind, the rate differential punishes the euro. The thesis that Old Continent is hostage to the American cycle has plenty of defenders. The US economy overheated and the European scenario worsened moment by moment, just the opposite of what orthodoxy expected.

With the Fed setting the trend and the ECB correcting late, the uncomfortable doubt remains: if the problem is supply-side rather than demand-side, how much can you tighten before breaking something already cracked?

Three meetings and one decision remain. Inflation stays above target, activity fades, and expensive credit is already felt in the paychecks of anyone who signed a variable-rate mortgage. Does the ECB raise rates and accept recession, or stay put and let stagflation eat its mandate?