Europe’s Central Bank to hike interest rates in July amid rising inflation

Author: Nishu June 9, 2022

Europe's Central Bank to hike interest rates in July amid rising inflation

The move underscores concerns about rising consumer prices, which grew at an annualized rate of 8.1% in May, the highest since figures began in 1997.

The move underscores concerns about rising consumer prices, which grew at an annualized rate of 8.1% in May, the highest since figures began in 1997.

The European Central Bank said on Thursday that it will raise its first interest rate in 11 years next month, followed by another in September, as it moves with other central banks around the world to support the economy during the pandemic. Holds up to increasing pressure. inflation.

The surprise announcement came after the bank’s 25-member Monetary Policy Council meeting in Amsterdam said inflation had become a “major challenge” and that in the 19 countries that use the euro currency, those forces were “widespread”. and faster”. It will end its economic stimulus program and increase rates by a quarter point in July.

The move underscores concerns about rising consumer prices, which grew at an annualized rate of 8.1% in May, the highest since figures began in 1997. The bank’s target is 2%.

The ECB left open the possibility that it would make a more drastic, half-percentage-point increase in September instead of the more usual quarter-point adjustment, saying that if the inflation outlook persists or worsens, “a big Wage hike would be appropriate” September meeting. ,

The bank’s president, Christine Lagarde, said the hike would not be the last. She said the rate-setting council anticipates “a gradual but continuous path forward” after September.

The US Federal Reserve raised its key rate by half a point on May 4, ruling out the possibility of a more major hike. The Bank of England has approved four rate hikes since December.

The prospect of a bullish move has sent shudders through the stock markets, as higher rates will drive returns on the less risky options of stocks. Rate hikes in Europe are also compounded by weak growth prospects as Russia’s war in Ukraine sends shock waves through the economy, particularly through rising energy prices.

Higher rates can make credit more expensive for businesses. However, the bank said in a policy statement that the growth path would be “gradual but continuous”.

“High inflation poses a great challenge to all of us,” the statement said. “The Governing Council will ensure that inflation returns to its 2% target in the medium term.”

By raising its benchmark, banks can influence what financial institutions, companies, consumers and governments have to pay to borrow the money they need. So higher rates can help cool an overheating economy.

But even higher rates can have an impact on growth. This strikes a delicate balance between the work of the ECB to reduce inflation and blunt economic activity.

The ECB on Thursday lowered its growth forecast for this year from 3.7% to 2.8%.

It raised its outlook for inflation, saying that the increase in prices this year will average 6.8%, up from 5.1% in the March forecast. It also raised the critical forecast for 2024 from 1.9% to 2.1%. This is significant because it indicates that the bank sees inflation as the target above for many years, a strong argument for higher rate hikes.

The euro’s exchange rate against the dollar rose nearly half a percent to $1.076 after the decision. Higher rates can increase the demand for investments denominated in a currency, which can lead to an increase in its exchange rate. The sudden jump indicates that the bank had gone further than expected in announcing the rate hike.

A move by the ECB to attack inflation has raised concerns about the impact of high interest rates on heavily indebted governments, particularly Italy. The bank did not announce any new support measures that could help such countries, saying only that it would respond flexibly if parts of the eurozone were facing exorbitant borrowing costs.

An extended period of extremely low rates that began during the global financial crisis, which began in 2008, ends the rise in rates. The hike will start from a record low of zero for ECB lending rates to banks and minus 0.5% on overnight deposits from banks. ,

9 June, 2022, 6:37 pm

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