ECB raises interest rates by 75 basis points amid looming recession

The ECB has raised interest rates once again as energy prices and inflation threaten to soar even higher and a recession looms.

Faced with an impending recession in the Eurozone, the European Central Bank (ECB) has once again raised interest rates. The Eurosystem’s main central bank chose to raise interest rates by 75 basis points, even as the cost of living in the region threatens to rise further. During this difficult period, individual consumers have cut back on consumption and businesses have had to cope with soaring energy costs.

The ECB’s latest interest rate hike also comes after inflation in the Eurozone hit 9.1% last month. As things stand, inflation looks set to enter the double-digit zone in the near future.

Policymakers predicted the ECB’s latest interest rate hike

A speech by ECB Executive Board member Isabel Schnabel in late August foreshadowed the latest interest rate hike. Also referring to the state of the eurozone’s fiscal forecasts prior to the interest rate hike, BNP Paribas economist Paul Hollingsworth had said:

“With hawks continuing to hold the upper hand, we expect the ECB to proceed with a 75 basis point increase. We now expect a faster tightening cycle that will bring the deposit rate to a final rate of 2% by the end of the first quarter.”

Also echoing Hollingsworth’s sentiments around the same time, ECB observer and Berenberg chief economist Holger Schmieding had said:

“Since early hikes can have a bigger impact on inflation expectations than a more gradual approach, a 75 basis point move could make sense.”

In addition, Mr. Schmieding added that “although largely taken into account, could still exacerbate bond market stress.

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As price pressures look set to exceed the gloomiest of forecasts, the ECB is forecasting further increases in the coming months. In addition, the recent halt in gas deliveries to Europe through the Nord Stream 1 pipeline is also having a negative impact on the region. Thus, in addition to increasing the risk of recession, this development has pushed down stock prices. In addition, it is also primarily responsible for the surge in Italian 10-year government bond yields to 4%. This represents the highest level since mid-June, before the ECB introduced the anti-fragmentation tool.

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Divergent views on rising rates

This latest massive ECB interest rate hike typically contravenes a 10-year period of ultra-low rates. That’s why many leading policymakers, including Greek central bank governor Yannis Stournaras, have argued for a smaller hike.

However, it also makes sense that the aforementioned macroeconomic factors would force the ECB’s hand. From the perspective of the large group of policymakers in favor of a 75 basis point hike, the benefits outweigh the drawbacks. For example, a timid decision by the ECB would have further weakened the euro against the U.S. dollar. This is because the U.S. Federal Reserve is clearly raising interest rates much faster than the ECB. This, in turn, would have fueled inflation, which would also have led to higher dollar-denominated energy prices.

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