In an effort to combat record inflation, the European Central Bank on Thursday raised interest rates for the first time in more than a decade—“by the largest amount since the early days of Europe’s currency union,” according to The Wall Street Journal (subscription).
What’s happening: “The bank said in a statement that it would increase its key rate to 0.75% from zero—its second hike this year following a 50-basis-point rise in July—and signaled that further rises were likely over the coming months.”
Why it’s important: Inflation in Europe, which has surpassed U.S. inflation levels in recent weeks owing to the war in Ukraine, is moving beyond energy to a large array of products, ECB President Christine Lagarde said at a news conference yesterday.
- “Rising borrowing costs will likely increase the risk of a slide into recession for Europe, whose households and businesses are wrestling with surging costs and sagging confidence.”
However … The ECB’s rate is well below those of other central banks. The Federal Reserve, for example, is expected to up its benchmark rate in the coming weeks to between 3% and 3.25%.
- The ECB has been cautious on rate raises “because the eurozone’s economic recovery during the COVID-19 pandemic has been relatively slow, and officials initially expected inflation to decline this year.”
- The ECB will not yet reduce its government debt holdings, Lagarde said, which the Fed began doing in June.
Will it help? “[E]urozone inflation is being driven primarily by soaring energy prices and persistent supply bottlenecks, which the ECB can do little to solve.”
The last word: “The European Central Bank is in an awkward spot,” said NAM Chief Economist Chad Moutray. “On the one hand, the eurozone economy is on the brink of recession, exacerbated by the Russian invasion of Ukraine, and its own forecasts have a downtime in its outlook for later this year.”
- “Yet, on the other hand, soaring inflation, especially for food and energy, has forced the ECB’s hand. It needed a historic 75-basis-point rate hike to tackle pricing pressures.”
- “With all of that said, growth in interest rates in Europe will not keep up with an aggressive Federal Reserve, which is likely to increase rates by 75 basis points later this month for the third consecutive meeting.”