The European Central Bank (ECB) diverged from the Federal Reserve by increasing its key interest rate by 0.5% points and indicated it would impose a similar increase in March as well. This was done because robust economic growth in the eurozone and a rapid reopening of China’s economy is expected to keep inflation high.
ECB’s Fifth Interest Rate Hike
The ECB has been increasing interest rates at a record pace in order to combat a sudden bout of high inflation in the eurozone. This comes as a byproduct of a number of factors, including the aftermath of the Covid-19 pandemic and an energy crisis that followed Russia’s invasion of Ukraine. With this move, the ECB raises its benchmark rate to 2.5%, the highest level since 2008. It still falls well short of the rates set by the Fed, which boosted them to 4.75% to 4.50% on Wednesday, and the Bank of England, which raised them to 4% earlier on Thursday.
The leading central bank announced in a statement that it would not deviate from its plan to continue raising the interest rates. ECB has indicated that it plans to increase interest rates by another half percentage point in March, after which it will assess the future course of its monetary policy.
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This strongly suggests that the European Central Bank (ECB) will be more assertive in raising interest rates in the coming months than the Federal Reserve and the Bank of England. It is highly possible that its choices will have a ripple effect throughout the financial markets, driving up the value of the euro and putting pressure on the pricing of bonds issued in the eurozone.
Growing Concerns On Inflation
Inflation in the Eurozone decreased to 8.5% last month from a record of 10.6% in October, which was higher than the 6.5% inflation rate in the United States for December. Low gas storage levels and a warm European winter have contributed to lower energy costs in Europe, while the price of imported products–particularly energy–has decreased as global supply constraints have relaxed & the euro has increased from less than $1 during the past three months to roughly $1.10.
On the other hand, England’s Monetary Policy Committee increased the main bank rate by a half-point by a vote of 7-2, bringing it to 4%. However, the committee hinted in its decision statement that future meetings may see smaller rate increases. The Bank of England was quoted as saying:
Annual CPI inflation is expected to fall to around 4% towards the end of this year, alongside a much shallower projected decline in output than in the November Report forecast.
The Bank of England changed its assessment of the economy on Thursday, stating that it anticipates a recession that will be shorter and milder than its previous estimates shared in November of 2022.
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