Record inflation and the collapse of the euro. The ECB is raising rates

In September, we can expect a new increase in key rates under the pressure of a widening gap in interest rates in Europe and the US.

The European Central Bank raised key rates for the first time in 11 years – by 50 basis points at once. In this way, the regulator will fight record inflation, whose level was 8.6 percent in June, despite the fact that the ECB’s target is no more than two percent.

In the past, the ECB has long avoided raising rates due to the euro area debt crisis, low inflation and the pandemic straining the economy. The further pace of ECB policy tightening will depend on the state of the economy in the euro area. Correspondent.net telling the details.

The ECB is in a difficult situation.

Following the results of the July meeting, the European Central Bank raised all three key rates yesterday by 0.5 percentage points simultaneously. On loans – from zero to 0.5 percent, on deposits – from minus 0.5 percent to zero, on margin loans – from 0.25 percent to 0.75 percent.

The increase, the first since 2011, was based on an updated assessment of inflation risk by the Board of Governors, the ECB said. The decision will help bring inflation back to the 2 percent target in the medium term. It should be noted that following the results of the previous meeting, the regulator announced plans to raise rates by 0.25 percent.

At the same time, the head of the ECB, Christine Lagarde, also noted the slowdown in the economic growth of the eurozone, including due to high prices affecting consumer demand, as well as due to the impact of the Russian war against Ukraine and restrictions in supply. The main reason for the increase in prices remains the cost of energy resources, said Lagarde.

“Inflation remains unacceptably high and is expected to remain above our target for some time,” he said.

In early July, Eurostat published a report on the highest annual inflation in the euro area last month – 8.6 percent.

Against the background of a partial ban on Russian oil supplies introduced in early June, prices for energy rose the most (42 percent compared to 39 percent in May), as well as food products , alcohol and tobacco (8.9 compared to 7.5 percent in May). ) ).

The highest inflation was recorded in Estonia (22 percent), Lithuania (20.5 percent) and Latvia (19 percent). At the same time, price growth slowed in Germany (8.2 percent compared to 8.7 percent in May).

However, the bank does not expect a recession in the euro area – the baseline forecast does not indicate this this year or next, Lagarde said.

The ECB’s new instrument, called the Transmission Protection Mechanism, is supposed to reduce the difference in borrowing costs for different eurozone states. The amount of redemption of bonds under this mechanism depends on the “seriousness of the risks.” The ECB noted that it should allow inflation to be contained in the medium term.

“As we normalize monetary policy, the Transmission Safeguard Mechanism will ensure the effective transmission of our monetary policy to all eurozone countries. Our policy coherence is a condition for the ECB to fulfill its role of stabilizing the prices,” said Lagarde.

The mechanism should ensure the smooth normalization of policy in all countries of the monetary bloc – it is planned to activate it in the case of “irrational and disorderly” dynamics in the markets. The size of the interventions depends on how serious the risk is – the program does not set any limits on the possible amount of redemption of bonds.

Also, the ECB will continue to influence the market by reinvesting the income received from the redemption of bonds under two programs of quantitative easing – the primary and anti-crisis, launched at the beginning of the pandemic. The redemption of assets under the first program ended in June, under the second – at the end of March.

A sharp increase in the difference in the yield of government securities was observed during the debt crisis. Then the buyers of the debt of the “peripheral” countries – in particular, such as Greece and Portugal – asked for a significantly higher yield than the German debt. Rates have grown on the bonds of the main economies – Spain and Italy.

This year, against the backdrop of higher rates in the United States, as well as increased risk fears in global markets, the required yield on European government bonds began to grow again – for example, in ten years Greek bonds, it rose from 1.3 percent to 4.6 percent since the beginning of the year. at its peak in June, it was more than 3.5 percent.

At the same time, a new increase in key rates can be expected in September. But further steps depend on real financial and economic data of the eurozone, the head of the ECB stressed.

Gertrud Traud, chief economist at German bank HELABA, said the ECB’s reaction was too late. Against the backdrop of historically high inflation in the euro area, he called the situation critical. “Central banks around the world have already raised rates,” DW quoted the expert as saying.

The ECB’s rate hike is a sign that the European regulator is willing to stick to its target of keeping inflation at 2 percent and ensuring the stability of the euro.

Normalizing monetary policy, in the words of Martin Luke, chief economist at the Blackrock investment firm, means holding to a “balanced” interest rate where the economy will accelerate rather than slow down. What is this balanced level in the euro area at the moment, it is difficult to determine, the expert added.

In addition, the ECB may also come under pressure due to the widening gap between interest rates in Europe and the US.

After US inflation reached 9.1 percent in July, the US Federal Reserve is expected to raise its key rate from the current level of 1.5-1.75 percent by another 75 basis points. This puts further pressure on the euro, which has already fallen to parity against the dollar last week.

In addition, the Italian government crisis, which is closely watched by the financial markets, worsens the situation. If the new government is led by Eurosceptics, it will likely lead to strong turmoil in the government bond market in the eurozone, said Edgar Wolk, chief economist at Metzler Bank.

News from Correspondent.net on Telegram. Subscribe to our channel Athletistic