The European Central Bank (ECB) has decided to raise interest rates by 75 basis points (0.75 percent), the highest level since the body was founded, in response to the relentless rise in inflation in the eurozone.
“The Governing Council made today’s decision and expects a further increase in interest rates, as inflation remains too high and is expected to remain above target for an extended period“, said a statement issued on September 8.
The agency notes that the interest rate hike will take effect Sept. 14 and warns that additional increases may be announced in the near future to “dampen demand and guard against the risk of a persistent rise in inflation expectations“.
According to Eurostat data, inflation in the region reached 9.1 percent in August, up two-tenths of a percentage point from 8.9 percent in July.
ECB analysts estimate that annual inflation will average 8.1 percent in 2022, 5.5 percent in 2023 and 2.3 percent in 2024.
This would be the second interest rate hike since the beginning of the year, as the ECB announced a 0.5% increase last July.
In this regard, Guillermo Santos Aramburo, of iCapital, indicated that at this time, while overcoming the effects of the Covid pandemic and with the energy crisis caused by the conflict between Russia and Ukraine, it seems “inconvenient or even foolish for the smooth running of the economy that interest rates should rise“.
In his analysis, he suggests that the ECB’s decision is likely to create anxiety in the financial markets. This is likely to affect the price of bitcoin given the high correlation between the crypto-currency and traditional markets.
Energy is the main driver of rising inflation
The financial institution pointed out that, to a large extent, the increase in inflation is due to the rise in energy prices. Added to this are the cost of food and demand pressures in some sectors due to the reopening of the economy after the pandemic.
“Very high energy prices reduce the purchasing power of the population’s income“, notes the ECB.
Energy prices in Europe have risen since Russia was sanctioned for its attack on Ukraine, but they got worse a few days ago when the EU agreed to impose a cap on the price of Russian oil.
Although the EU’s decision is not final, Russia has already responded that, if the sanction is implemented, it will not supply gas, oil or coal to Europe, as it is against its interests.
This has led some cities in France to decide not to use street lighting in order to save resources, and some businesses are planning to shut down in the coming months with the onset of winter, according to reports in The New York Times.