ECB joins rate hike club

Frankfurt, Jul 21 (BNA): The European Central Bank will raise interest rates for the first time in 11 years with a bigger-than-flag move seen as increasingly likely as policy makers fear losing control of unbridled consumer price growth.

With inflation already approaching double-digit territory, it is now at risk of solidifying above the European Central Bank’s 2% target.

Policymakers appear unconsolidated about how quickly the ECB should move, with some arguing that it is already off the curve, especially compared to global peers such as the US Federal Reserve, while others point to a looming recession the ECB risks exacerbating. .

Until recently, the bank had been signaling a 25 basis point increase, followed by a larger move in September.

Economic polls had only expected a 25 basis point increase, but most said the bank should in fact raise 50 basis points, bringing its record low from 0.5% to zero.

The euro’s recent plunge to a two-decade low against the dollar is also bolstering inflation pressures, adding to the case for further rate hikes even if it ultimately hurts growth.

When interest rates rise, borrowing costs on the periphery often increase disproportionately, and the European Central Bank has promised to combat this type of fragmentation with a new tool.

European Central Bank President Christine Lagarde is likely to stick to strict compliance and should provide financial markets with at least some details, including requirements for stimulating ECB assistance.

The European Central Bank is also set to signal a series of subsequent hikes and announced a 50bp hike for September, likely still on the cards.

The labor market in Europe is also increasingly tight, indicating that wage pressure is also likely to keep price growth high.

ZHB