The ECB counters inflation by raising interest rates by 75 points

The European Central Bank (ECB), caught up in record inflation, accelerated monetary tightening on Thursday by deciding to raise interest rates on an unprecedented scale.

The Board of Governors of the Monetary Institute has decided to raise interest rates by 75 basis points, a first in two decades – apart from a technical adjustment in 1999.

The interest rate on bank deposits at the ECB, which served as a benchmark against the backdrop of ample liquidity, was cut from -0.5% to 0% in July, rising to 0.75%.

The other two key interest rates, the one for banks in multi-week refinancing operations and the one for the daily marginal lending facility, are 1.25% and 1.50%, respectively.

Encourage savings and reduce consumption

Rate hikes should encourage savings and reduce consumption to ease price pressures.

As a sign of the ECB’s “determination” in the face of extremely high inflation, which “deviates significantly” from the 2% target, the decision to make this historic increase was “unanimous”, said its President Christine Lagarde.

Double-digit inflation fears

In July, the ECB had a firm hand announcing a surprise 50bp hike when 25bp was expected. This first surge in more than a decade came after a long period in which easy money helped boost the economy.

The promise then was to do the same in September provided inflationary pressures persist. However, euro-zone prices rose to a record 9.1% over a year in August, well above the ECB’s 2% target rate, which prompted it to send a strong signal on Thursday.

>> Read also: In view of inflation, the ECB is raising interest rates more than expected

The new tensions in energy prices since the complete halt to Russian gas supplies to Europe mean that double-digit inflation can even be expected in the autumn.

The hoped-for drop in prices will therefore be significantly increased by 2024, as the new inflation forecasts presented on Thursday show. The aggregate is set to rise to 8.1% by 2022, according to the ECB, before slowing to 5.5%. in 2023 and 2.3% in 2024.

GDP growth is still expected at 3.1% this year before slowing to 0.9% in 2023, much lower than the latest forecasts released in June.

hard line

Isabel Schnabel, German Member of the Executive Board of the ECB. [Daniel Roland – AFP]More inflation and less growth: In this darkened context, the hard line advocated in particular by German Isabel Schnabel, an influential member of the ECB’s Executive Board, weighed on the decisions of the day.

It is important to show “determination” in the face of unbridled prices, and this “even at the risk of weaker growth and higher unemployment,” demanded Isabel Schnabel at the end of August. It is crucial that the public “retains confidence in our ability to maintain purchasing power,” she stressed.

Until then, the dilemma between rising prices and recession fears has held back ECB action while other major central banks have started their rate-cutting cycle.

Within the Governing Council, a fraction of policymakers, led by chief economist Philip Lane, have defended a “gradual” approach to rate hikes. But this clan turned out to be in the minority despite the stack of alarming news piling up in the eurozone.

The euro’s weakness, falling below the $0.99 mark on Monday, could have provided another argument for a monetary hammer blow. A weak euro increases the cost of imported products, fueling inflation.

Fed ahead

Federal Reserve rates are already between 2.25% and 2.50% and a 75 basis point hike is on the cards on September 21st.

As for the ECB, according to observers, the tightening in September this year calls for more during the two meetings to be held before the end of the year.

>> Read also: The Fed hit hard, raising interest rates by three-quarters of a point

However, an aggressive interest rate policy by the ECB will tighten the credit conditions of countries in the euro zone that are considered vulnerable, such as Italy.

Sooner or later, the institute will probably have to resort to its new tool, which was presented this summer to nip speculative attacks on debt in the bud, according to Holger Schmieding, economist at Berenberg.


#ECB #counters #inflation #raising #interest #rates #points

Leave a Comment

Your email address will not be published.