European Central Bank to raise interest rate

Bisola David
Bisola David
European Central Bank to raise interest rate

The European Central Bank will almost definitely raise interest rates again on Thursday, continuing its war against inflation even as the eurozone enters recession.

According to The Punch, analysts predict that the ECB will follow May’s lead and increase borrowing costs once again by 25 basis points, bringing the widely watched deposit rate to 3.50 percent.

After peaking at 10.6 percent in October of last year, eurozone inflation dropped to 6.1 percent year-over-year in May, indicating the ECB’s measures were having an impact.

However, policymakers have emphasized that it was too soon to let up on the gas, hinting at rate increases even after June, given the bank’s two-percent inflation objective is still out of reach.

Rates are getting “closer to our cruising altitude,” according to ECB President, Christine Lagarde, but “we need to continue climbing,” she remarked earlier this month.

The situation is different in the US, where the Federal Reserve is anticipated to pause its cycle of rate hikes on Wednesday after 10 straight rises while it assesses how its tightening is affecting the actual economy.

Like central banks everywhere else, the ECB must walk a fine line between increasing borrowing prices to reduce demand and rein in inflation while avoiding a severe economic slump.

Revised figures from last week indicated that the 20-nation eurozone unexpectedly contracted by 0.1 percent for two consecutive quarters at the end of 2022 and the beginning of 2023, meeting the technical criteria for a recession.

Even though it was only moderate, the unexpected winter recession raise concerns that the region could not manage the consequences of Russia’s conflict as well as thought and calls into question more upbeat estimates for 2023.

According to ING bank economist, Carsten Brzeski, “the eurozone economy has turned out to be less resilient than anticipated a few weeks ago.”

Although sharply declining energy prices and dissipating supply chain bottlenecks have assisted in reducing inflation in recent months, service prices continue to be high in part due to high demand in the tourism industry.

Officials from the ECB have also expressed concern about wages being a significant factor in inflation as workers leverage the record-low jobless rate in the eurozone to intensify their requests for wage increases to offset rising living expenses.

As they consider when to alter course, policymakers have emphasized that they are closely monitoring core, or underlying, inflation, which excludes volatile food and alcohol costs.

Core inflation in the eurozone has been stubbornly high and has only marginally decreased from 5.6 percent in April to 5.3 percent in May. Recent projections from the ECB place it at 2.2 percent in 2025.

Lagarde cautioned last week that “there is no clear evidence that underlying inflation has peaked.”

Before “skipping or pausing” its rate-hiking cycle, the ECB will require “robust evidence that underlying inflation is slowing,” according to economists at Deutsche Bank.

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