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The ECB has once again hiked interest rates as energy prices and inflation threaten to soar even further and a recession looms.
In the face of looming recession across the Eurozone, the European Central Bank (ECB) has once again hiked interest rates. The prominent central bank of the Eurosystem opted to raise interest rates by 75 basis points even as costs of living across the region threaten to climb higher. This harrowing period has seen individual consumers cut back on their consumption, in addition to companies contending with soaring energy costs.
The latest ECB interest rate hike also comes after inflation in the Eurozone hit 9.1% last month. As it stands, inflation now seems poised to enter double-digit territory sooner rather than later.
Policy Makers Had Foreshadowed Latest ECB Interest Rates Hike
A speech by ECB Executive Board Member Isabel Schnabel in late August foreshadowed the latest interest rates hike. Also touching on the state of the Eurozone’s fiscal prognosis before the interest rate bump, BNP Paribas economist Paul Hollingsworth had stated:
“With the hawks continuing to hold the upper hand, we think the ECB will deliver a 75 basis point increase. We now expect a more front-loaded tightening cycle that takes the deposit rate up to a terminal rate of 2% by the end of the first quarter.”
Also echoing Hollingsworth’s sentiments at around the same time, ECB watcher and Berenberg’s Chief Economist Holger Schmieding had stated:
“As frontloaded hikes can have a bigger impact on inflation expectations than a more gradual approach, a 75bp move could make sense.”
Furthermore, Schmieding added that “although it is largely priced in, it could still exacerbate strains in the bond markets.”
As price pressures appear set to surpass the bleakest forecasts, the ECB plans more hikes in the coming months. Furthermore, the recent cessation of gas deliveries to Europe through the Nord Stream 1 pipeline is also adversely impacting the region. For instance, in addition to increasing the risk of a recession, the development has lowered stock prices. In addition, it is also primarily responsible for pushing the 10-year yields on Italian government bonds to 4%. This represents the highest level since the middle of June before the ECB introduced the creation of an anti-fragmentation tool.
Differing Opinions on Rates Hike
This latest massive ECB interest rate hike typically contravenes a 10-year period of ultra-low rates. To this, many prominent policymakers, including Greek central bank governor Yannis Stournaras, have advocated for a smaller move.
However, it also stands to reason that the aforementioned macroeconomic factors are forcing the ECB’s hand. From the perspective of the substantial group of policymakers favoring the 75-basis point hike, the pros outweigh the cons. For instance, a tepid move by the ECB would have further weakened the euro against the US dollar. This is because the Federal Reserve is evidently raising its interest rates much faster than the ECB. This would in turn further feed into inflation, thereby also driving up the price of dollar-denominated energy.