|
|
On 8 September, the 25 members of the European Central Bank (ECB’s) governing council voted unanimously to raise the bank’s key interest rate by three-quarters of a point, even though many analysts have warned that suddenly higher rates will push the region’s economy into recession.
The last time the bank jacked its rate by that much at once was in 1999.
The ECB’s interest rate is now above zero for the first time in 11 years.
The new rate followed a half-point increase the bank imposed in July.
Increases of this magnitude are not “the norm,” ECB president Christine Lagarde told a press briefing after the meeting, but added that there are “probably more than two but less than five” more increases ahead to bring inflation down from its current 9.1 percent, which is “far too high,” she said.
The bank’s target inflation rate is 2 percent.
“We want all economic actors to understand that the ECB is serious” about overcoming inflation, Lagarde added.
Inflation resulting from skyrocketing energy prices is infecting other areas of the economy, she warned.
Inflation in the Eurozone rose to 9.1 percent in August as the U.S. rate fell from that level to 8.6 percent last month. Inflation in Europe is likely to post double digits in the months ahead as energy costs continue upward, economists have predicted.
The higher interest rate raises the risk of a region-wide recession because it comes as energy prices continue to rise now that Russia has indefinitely shut off its Nord Stream 1 pipeline, which has supplied more than a third of Europe’s natural gas.
After the council met, the euro slipped 0.4 percent against the dollar to $0.996 and the yield on Germany’s 10-year bonds rose to 1.72 percent, its highest in eight years, The Wall Street Journal said. Italy’s rate reached 4 percent.
The spread between Germany’s and Italy’s rates stood at 2.2 percentage points on 8 September, nearing the distance that in June spurred the ECB to take emergency measures to shore up Italy’s credit market.
Also following the ECB’s action, Denmark’s central bank added three-quarters of a point to its rate under its mandate to keep the crown, its currency, stable against the euro.
Denmark now has a positive interest rate for the first time in more than nine years.
The ECB also will not yet begin to close out its multi trillion-euro holdings of government debt, Lagarde said.
The ECB has moved more cautiously than other central banks because Europe’s recovery from the COVID infestation has been slower and less stable than that of the U.S. and many other nations.
The ECB raised its 2022 growth projection for the Eurozone to 3.1 percent but chopped its expectation for next year to 0.9 percent and 1.9 percent in 2024.
TRENDPOST: The ECB has a lingering case of Central Bankster Syndrome: waiting to raise interest rates for fear of damaging economic growth while inflation rages at a record pace, damaging economic growth.
There was plenty of evidence that inflation was out of control before Russia invaded Ukraine. Why was that the factor that made a rate boost urgent? Because they, as with other central banksters, wanted to artificially prop up economies devastated by the COVID War lockdowns and draconian sanctions that have destroyed the lives and livelihoods of millions across Europe… and billions across the planet.
TREND FORECAST: As we had forecast in “Euro Sinks as ECB Holds Interest Rate at -0.50 Percent” (26 Apr 2022), the ECB will raise interest rates this year but it has waited too long.
Its rate hikes will be too small and too gradual to matter to inflation. The region’s economy will sink into our Top 2022 Trend of Dragflation, with prices rising and economic activity declining, in part due to the ECB’s failure to act in time.
Furthermore, with inflation at 9.1 percent and interest rates only at .75 percent, real interest rates are deep in negative territory.
And with the travel season now over, economic growth will also slow down.