European Central Bank intensifies its efforts to combat inflation while Europe’s economic situation worsens
The European Central Bank raised the three key interest rates by the largest amount since the early days of Europe’s currency union, whereas an energy crisis brings Europe closer to the brink of recession.
The move is a second hike this year after a 50-basis-point rise in July. Moreover, ECB suggested that further aggressive rises were likely over the coming months.
Market reaction was predictable. Thus, the euro slid to about 99.7 cents against the dollar after the announcement. In addition, investors dumped European government bonds, preparing to price in more interest-rate increases in the months ahead.
Although the strategy of the European bank regulator is similar to the U.S. and Canada, ECB is in a more challenging economic position than its North American counterparts. Europe’s economy is being hit harder by the war in Ukraine since the EU countries are more dependent on Russian energy supplies. Therefore, inflation in the eurozone has surpassed U.S. levels in recent weeks as Russia’s halt of gas supplies to Europe has driven prices up.
Nevertheless, the ECB’s policy rate is significantly below the rates adopted by other major central banks. For instance, the Fed is expected to increase its benchmark rate later this month to a range between 3% and 3.25%. European bank authorities move cautiously because they worry about the influence of higher borrowing costs on weaker economies in Southern Europe.
At the same time, experts note that ECB moves would do little to restrict inflation. It is being driven primarily by soaring energy prices and persistent supply bottlenecks. Therefore, government interventions to shield energy users from losing their purchasing power will have a much bigger impact on inflation and the depth of the looming recession than any rate hikes.