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In an effort to combat inflation, the European Central Bank has announced a record increase in interest rates for the eurozone.
As energy prices increase, prices in the bloc are rising at their fastest rate in 50 years.
The ECB raised all of its major interest rates by three-quarters of a percentage point, which also forewarned that it would likely hike rates again later this year.
The bank increased interest rates in July for the first time in more than 11 years. However, after its most recent decision, the ECB stated that price pressures have continued to grow stronger and more widespread throughout the economy.
The European Central Bank (ECB) increased its main refinancing rate (the amount that banks must pay when borrowing money from the ECB) from 0.5% to 1.25% and its key deposit rate (how much interest it pays on deposits) from zero to 0.75%.
Central banks hike interest rates to make borrowing more expensive, encouraging consumers to borrow less, save more, and spend less. This should prevent price increases.
The cost of energy has increased, which is contributing to global inflation. Prices were rising faster as economies recovered from the effects of the coronavirus epidemic, but they increased even more as a result of Russia’s conflict in Ukraine.
According to ECB President Christine Lagarde, the central bank was powerless to reduce the high cost of electricity.
She continued by stating that it would be recessionary if petrol prices continued to soar.
Gas rationing across the entire euro area and a recession in 2023 are two scenarios the ECB envisions if Russia totally cuts off gas supplies to the EU and cannot secure alternative gas supplies from Asia, Norway, and the US, according to Ms. Lagarde.
Markets continue to anticipate a further half-point increase at the bank’s October meeting because the ECB statement specifically stated that additional rate hikes would be required.
According to Eurostat, the inflation rate in the euro area is predicted to increase to 9.1% in August from 8.9% in July.
ECB is ‘playing catch-up’ in the interest rates game
The ECB is “playing catch up,” according to Janet Mui, head of market analysis at investment manager Brewin Dolphin, with the US Federal Reserve and the Bank of England, which have already been hiking interest rates.
According to the ECB, inflation in the eurozone is expected to be 8.1% this year, 5.5% in 2023, and 2.3% in 2024, although these projections are highly questionable given the volatility of gas prices.
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Some experts foresee a decline in the eurozone due to rising energy prices eroding purchasing power.
Some policymakers have mentioned a recession, and the ECB’s updated forecasts for the years to come also indicate much slower growth.
The euro area’s economic growth is predicted to significantly slow down later this year, and in the first quarter of 2023, the ECB says, following a recovery in the first half of 2022.