The European Central Bank (ECB) raised interest rates by 50 basis points trying to control inflation in the eurozone
According to Reuters, ECB hiked interest rates by more than expected, while the EU economy is suffering from the impact of Russia’s war in Ukraine. The Bank raised its benchmark deposit rate by 50 basis points to 0%. Before the announcement, ECB had long guided markets to expect a 25 basis point increase. However, the enhanced measure came into discussion as inflation was spinning out of control. It was the ECB’s first rate increase in 11 years.
Bank authorities also agreed to provide extra help for the EU’s most indebted nations. The solution is a new bond purchase scheme intended to cap the rise in their borrowing costs, thus, limiting financial disintegration. In addition, the ECB lifted its refinancing rate to 0.50% and promised more hikes, possibly in September.
The aggressive economic move was triggered by deterioration of the inflation outlook. The driving factors include higher food and energy costs and wage rises.
Nevertheless, the terminal rate where hikes end has not changed. The ECB did not shed any light on the expected rate hike in September. The only clear thing is that further increases will happen if required, but decisions will depend on how the situation unfolds.
At present, inflation in the EU is already approaching double-digit threshold. Besides, it may go well above the ECB’s 2% target since possible gas shortage in the winter-to-come will spur rapid price growth. The situation at the Russian-Ukrainian front lines tells us that the war might drag on for a long while. Therefore, risks of higher energy and consumer goods prices intensify.