the European Central Bank increased interest rates By a record margin in the eurozone to counter rising inflation reaching double figures in some of the currency bloc’s 19 member states.
allaying concerns that higher rates will add to the current pressure on consumers’ disposable income and increasing the depth of an impending recessionThe central bank’s 25-member governing council raised its key benchmark to 1.25% from an unprecedented 0.75 per cent.
The move follows similar increases by the US Federal Reserve and is expected to pressure the Bank of England to follow suit, when its policymakers meet next week to review UK monetary policy.
The ECB at its last meeting in July announced the first hike in rates in 11 years, raising rates by half a point.
Its benchmark for lending to banks is now 1.25%. The Fed’s main benchmark is 2.25% to 2.5% after several large rate hikes, covering three-quarters of a point. The key benchmark of the bank is 1.75%.
Rising eurozone inflation, which last month soared to a record rate of 9.1% amid rising natural gas prices, has forced the ECB to tear down its general rule book of incremental growth.
Altaf Kasam, head of European investment strategy at State Street Global Advisors, said the increase was “inevitable” after a surprise jump in the headline rate of inflation in August.
Price increases in France fell to 5.8% from 6.1% in July, but increased in most other eurozone countries.
“The ECB had to respond forcefully to criticism for falling behind the curve, especially with concerns that the effects of the second round were beginning to take hold. This hike was also about keeping a floor below the euro, and keeping a lid on excess imported inflation was offset by its weakness,” he said.
Concerns over pushing workers to push for wage increases that will offset inflation have proved largely unfounded, but central bank officials have said they are concerned that without a set response to rising inflation, unions will continue to work in the coming months. I will claim higher salary.
The euro has leveled off against the dollar in recent months, with the cost of imports rising and increasing pressure on broader price increases.
Willem Sells, global chief investment officer for HSBC’s private bank, said the ECB was torn about the decision when higher interest rates would make it easier for firms to pay debt interest costs and invest in new ventures and deepen the recession.
“The ECB and other central banks are torn between their realization of the need to crush inflation and the risk of recession continuing to increase.
“So the markets were uncertain whether the ECB would raise 0.5% or 0.75%. The ECB took a more aggressive option, opting for 0.75%, in line with the more aggressive tone being sent by central banks since the Jackson Hole meeting of central bankers in late August.
Featuring a gathering of central bank governors in Jackson Hole, Wyoming last month Commitments to address inflationary pressures Despite the recession forecast.
US Fed boss, Jerome Powell, said the Fed’s “extreme focus right now is to bring inflation back”, adding that the Fed will continue to use its tools “coercively” until prices are under control.
“We should continue this till the work is done,” he said.
Some skeptics accused the ECB of overreacting, despite being lagging behind the major central banks.
“There is a substantial risk that this laid-back approach by the ECB will not only lead to lower growth and employment than now, but will require reducing inflation,” wrote Eric F Nielsen, group chief economics adviser at UniCredit Bank.
“Growing concerns about their reputation could prompt the ECB, and possibly even the Fed, to pursue monetary tightening,” he added.
“We still find it difficult to see how aggressive rate hikes can bring down headline inflation in the eurozone,” said Carsten Brzewski, chief eurozone economist at ING Bank.
“The economy is far from overheating and will almost inevitably fall into a winter recession, even without further rate hikes.”