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Faced with decades-high inflation, the European Central Bank (ECB) has indicated it will raise its key interest rate from the -0.50 percent, where it has remained for eight years to a positive 0.25 percent this September.
However, investors have overestimated the bank’s ability to raise rates aggressively enough to pull inflation back to its 2-percent target by 2024, according to Michael Krautzberger, fixed income strategist for BlackRock, the private equity firm with $10 trillion under management.
The bank should indeed raise its rate, he added.
However, the region’s struggling economy and the current debt load of nations still recovering from COVID-era shutdowns will restrain the bank’s pace and size of rate hikes, he cautioned.
“The underlying problem over the past 15 years was that Europe was not able to sustain growth of 2 percent,” he explained.
“This is a good opportunity for the ECB to end its bond-buying program and negative rates,” he said. “After that, they may need to slow down. The situation argues for going quite carefully.”
Consumer confidence and the outlook for the region’s economy “are at all-time lows,” he pointed out, and higher interest rates “will have a massive impact on the property market.
“If you look at the reasons why inflation is so high, the majority are really bad for growth—an increase in oil and food prices and broken supply chains . I don’t think there is anything signaling that the European growth malaise has been overcome for good.”
TREND FORECAST: Ever cautious, the ECB will maintain a pace of rate increases that does as little as possible to disturb Europe’s economy but will do little to help it, either.
Thinking a 0.25-percent interest rate this fall reduces inflation is like thinking that a size two shoe can contain a size eight foot.
Europe’s inflation will as the economy worsens overall and consumers become less willing to spend, not when the ECB offers a token rate increase.
The “best” prospect to reduce the region’s inflation is sharply raising interest rates that would sink much of the EU into deep recession. And given the area’s sharply spiking energy costs and food prices, the chances of a European recession are imminent.
In fact, as we had noted, Germany, the biggest economy in the EU, was at the brink of recession at the end of 2019… just before the COVID War was launched in 2020. And, as with the U.S. and other nations, the EU economy has been artificially jacked up with record low interest rates and massive government buying of government and corporate bonds.
But now, with the injections of monetary methadone drying up and too costly, plus the implications of the Ukraine War and the sanctions, the very worst is yet to come. Indeed, Europe is on the brink of economic and mental depression.