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The European Central Bank (ECB) decided to raise its key interest rate last week to 0.75 percent because, in part, the bank’s governing council feared the weak euro would drive inflation even higher, minutes from the group’s last meeting showed.
The euro was worth $1.20 in early 2021. Earlier this year, it slid to parity with the dollar and last week dipped to $0.996 after the rate increase. The euro climbed back to $1.01 on 12 September.
The euro has further to fall, analysts think.
The shared currency will sink to $0.97 this quarter, Morgan Stanley analysts predict, its weakest in almost 20 years.
Nomura International PLC sees the euro at $0.975 by the end of this month, with a bottom around $0.95 level or possibly even lower as the region’s energy crisis worsens, cutting economic output and necessitating greater fuel imports at higher costs.
The council’s concerns over inflation outweighed the possibility that a higher interest rate would hobble economic expansion, according to the council meeting’s minutes.
“Members widely noted that the depreciation of the euro constituted an important change in the external environment and implied greater inflationary pressures for the euro area, in particular through higher costs of energy imports invoiced in U.S. dollars,” the minutes said.
Eurozone inflation climbed to a record 8.9 percent in July, fueled by higher food and energy costs and a sharper-than-expected hike in wages.
“It was argued that even a recession would not necessarily diminish upside risks, especially if it was related to a gas cut-off [of Russian imports] or another supply shock,” the minutes reported.
Some council members countered that low growth would tame inflation.
While some council members urged their colleagues to hold to the previous plan to raise the rate a quarter point, from zero to 0.25 percent, the majority agreed that the bank’s new bond-buying plan to equalize borrowing costs across euro-using countries justified the larger bump.
TREND FORECAST: Like the U.S. Federal Reserve, the ECB waited far too long to lift rates to tackle inflation. Interest rates are unable to rise high enough fast enough to get a grip on rising prices.
Inflation is most likely to end because consumers can no longer afford to buy things.
Rising food prices and energy costs will leave nothing left for discretionary purchases. The service economy will enter a recession first, followed by the consumer discretionary market.
Today, following the U.S. higher than expected inflation numbers which indicates at least a .75 interest rate hike by the U.S. Feds, the euro slumped again against the dollar. Thus, the more the euro falls, the more it costs to buy less.