The European Central Bank on Thursday announced a 75 basis point hike in interest rates, taking its benchmark deposit rate to 0.75%.
“This major step precipitates the transition from the very accommodative level of policy rates to levels that will ensure the rapid return of inflation to the ECB’s medium-term target of 2%,” he said in a statement. .
He added that he “expects to raise interest rates further as inflation remains far too high and is expected to remain above target for an extended period.”
It revised its inflation expectations upwards, forecasting an average of 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024.
Markets had largely priced in a 75 basis point rise, with the euro holding steady against the pound and rising slightly against the dollar at 1.0005. On Monday, the euro fell below 99 cents for the first time in 20 years.
The ECB’s move follows a -0.5% to zero hike at its July meeting. The central bank, which sets monetary policy for the 19 countries using the euro, has kept rates in negative territory since 2014 in a bid to boost spending and tackle low inflation.
The central bank now faces an entirely different problem, with consumer prices in the euro zone rising 9.1% in August, setting a ninth straight record.
Inflation is being boosted by soaring energy prices, which have soared since Russia’s invasion of Ukraine in February. Price increases are also observed in areas such as food, clothing, cars, household appliances and services. Factors such as ongoing supply chain issues and the ripple effects of recent heat waves have helped push prices higher.
The ECB’s decision signals that it is ready to sacrifice growth to combat these pressures.
Gross domestic product in the eurozone rose 0.8% in the second quarter, however, many analysts say a recession in the eurozone is almost inevitable in the coming months as consumer purchasing power is reduced and firms struggle to pass on rising input costs. .
As in the United States, the recession warnings come despite an extremely tight labor market, with unemployment across the bloc at a record high of 6.6%.
“The ECB and other central banks have been torn between the need to crush inflation and their realization that recession risks continue to rise,” said Willem Sels, global chief investment officer at HSBC.
“Gas prices have risen sharply, and we know that the ECB is concerned that rising inflation will lead to higher wage demands, which could make inflationary pressures more tenacious. Monetary policy is acting with a lag, and ECB governors may have deemed it best to anticipation rate hikes and complete the hike by the end of the year,” he added in a note.
Sels said bond and equity markets reacted with “some concern.”
Rate hikes will further increase borrowing costs for peripheral countries and tighten financial conditions, which could deepen the recession,” he added.
The pan-European Stoxx Europe 600 index was down 0.42% after the announcement, after a morning in the green
Any benefit to the euro would not be sustainable given the expected rate hikes by the Federal Reserve and the Bank of England, the rising cost of debt, a potential recession, the upcoming Italian elections and geopolitical risk, added Sels.
The pan-European Stoxx Europe 600 index was down 0.42% after the announcement, after a morning in the green.
Any benefit to the euro would not be sustainable given the expected rate hikes by the Federal Reserve and the Bank of England, the rising cost of debt, a potential recession, the upcoming Italian elections and geopolitical risk, Sels said.
Thursday’s rate hike keeps the ECB below its “neutral” rate of between 1% and 2%.
Konstantin Veit, portfolio manager at investment firm Pimco, told CNBC’s “Squawk Box Europe” on Thursday that it was now “uncontroversial” within the Frankfurt-based institution to enter that range before the end of the year.
The “most interesting” question now, he said, was what his “terminal rate” – the highest point – will be during this hiking cycle.
Markets will now look for clues as to whether it will cross above the neutral range into tightening territory.
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