ECB: Lagarde's final blow to a moribund economy

Lagarde's Trichetazo: 25 basis points more to an economy on its knees

How long does it take a central bank to admit it is late? The ECB raised interest rates to 4% and signaled further hikes. It acted a year behind inflation's start, after months calling it transitory. With the European economy showing weakness, the pattern is uncomfortably familiar: the same mistake Trichet made in 2008, repeated fifteen years later.

From transitory inflation to late hikes

The sequence repeats in monetary policy debates. First, inflation was transitory and needed no action. Then, as it persisted, rates rose sharply from a late start. Now, a further tightening of 25 basis points arrives as activity deteriorates, according to many analysts.

The delay has a name: the Trichetazo. In 2008, the ECB tightened policy just before the financial crisis exploded, then reversed course hastily. Fifteen years later, this comparison is central to criticism: action is late, and remains late despite clear slowdown.

Why raise rates if the European economy is faltering?

The official argument is clear. The European Central Bank's mandate is to keep euro zone inflation below 2%, and current levels are far above. Raising rates is the tool to curb it; cutting them would accelerate growth. Defenders note that the decade of 0% rates coincided with sustained money issuance.

The objection is direct. With the European economy struggling, each hike makes credit more expensive, contracts investment, and punishes exhausted households and firms. The alternative proposal is to keep rates at current levels and observe the effect of previous hikes during this year. Only if inflation rises clearly would tightening be defended. The problem, admitted even by those favoring waiting, is that one cannot fight high inflation and an incipient recession simultaneously.

The real cost: more expensive mortgages and a shopping basket 28.4% higher

The numbers turn theoretical debate into tangible reality. Variable-rate mortgage holders will see monthly payments rise by an average of 50 euros per month for every 100,000 euros of outstanding capital, with the new rate hike increasing annual mortgage costs by about 2,000 euros. Meanwhile, lenders have tightened loan access conditions.

On the other side, savers see some benefit: deposits improve gradually, and some products now pay a 3.88% dividend. However, the fine print is the shopping basket. Food prices in Spain have risen in the last 25 months as much as in the previous 18 years: the basket is 28.4% more expensive than in September 2021, with an additional 1.3% monthly increase in October. The breakdown of which products drive the index is the most consulted part.

The printer and public debt: the argument the ECB does not answer

One analytical stream argues the problem is not rates, but who continues spending. Raising the price of money slows purchases by families and firms, but states continue borrowing, spending, and injecting liquidity. As long as public debt flows remain open, inflation will not fall: states cannot spend more than they earn.

The technical objection is that the ECB no longer prints at 2021's pace, though it continues buying and refinancing. The discussion shifts to geopolitics: soaring energy, European dependence, and the cost of sustaining the euro. Then comes the murky terrain of theories on why things happen, where no single figure settles the matter.

The Red Sea, oil, and an inflation target not reached until 2025

The scenario worsened on the supply side. Attacks in the Red Sea raised maritime transport costs by 170%, taking containers from China to Spain from 1,500 to 7,000 dollars. With crude oil pointing to 100 dollars before Christmas, according to prevailing forecasts, January's inflation surge left little argument for expecting imminent rate cuts.

The ECB itself confirmed this with its harshest language: it estimates inflation will not approach its target until mid-2025 and maintains a sufficiently restrictive stance against a market that does not believe it. Lagarde, in fact, has refused to anticipate the next move with a formula leaving everything open: rates can be raised or held. Markets, meanwhile, continue pricing the opposite of the central bank.

Raising rates to cool an economy has a small drawback: the European economy was already cold. Fifteen years after the first warning, we still wait for someone to admit that perhaps the thermometer was broken.