European Central Bank hikes interest rates by 0.5%, pledges further big hike in March

The European Central Bank raised interest rates five times in a row at its first meeting of the year.

The hawkish move in Europe contrasts with the US Federal Reserve’s 1/4 percentage point slowdown in base rate hikes on February 1st.

Policymakers at the central bank in Frankfurt pledged to raise the policy rate by another 50 basis points on February 2nd, and did the same in March.

With inflation rising across the eurozone, the ECB was one of the last major central banks to respond to last year’s crisis, sharply raising its benchmark rate to 3% over the past seven months.

The Fed’s Fed funds rate after yesterday’s meeting is in the range of 4.50-4.75%.

The ECB’s move is partly explained by the delayed start of the rate hike when it began in July, four months after the Fed made its first rate hike, but four months after the Fed made its first rate hike. After a month, we had to catch up because we started at a low level.

ECB maintains hawkish interest rate policy

“The Policy Board will continue to raise interest rates significantly at a steady pace,” the ECB said in a statement.

“We intend to raise interest rates by another 50 basis points at the next monetary policy meeting in March, and we will assess the direction of monetary policy thereafter,” said policymakers.

The ECB remains aggressive to deal with price spikes that have since slowed from record highs in 2022, but continue to hit Eurozone households.

“We will maintain our policy of significantly raising interest rates at a steady pace,” ECB President Christine Lagarde said at a news conference.

“Now you would say, ‘Yes, but what about after March? Does that mean you’ve reached the top or the top?'” she added later.

“No, no, no, no. We know we have grounds to cover. We know we’re not done yet.”

Central Bank Policymakers Discuss Inflation Control Policies

While underlying inflation remains at its highest level in decades in much of the West, wage growth, a key component of long-term inflation, continues to accelerate in a tight labor market.

The unemployment insurance claim rate also remains at a record low.

Officials hope higher borrowing rates will slow consumer demand and prevent high prices from becoming a long-term factor.

Markets are still pricing in a full 1 percent rate hike after the ECB’s move, with deposit rates at their highest in more than 20 years, according to Reuters.

The ECB has raised deposit rates from 2% to 2.5%. This is what he was due for in December, and the Bank of England maintained his hawkish policy with his 0.5 point hike, which he did on February 2 as well.

Meanwhile, central banks around the world, including the Fed, are reassessing their approach to controlling inflation as prices begin to slow.

The US central bank’s move on February 1 clearly showed a slowing trend in the pace of policy tightening, suggesting that the ECB’s window of opportunity could start closing sooner than expected.

Policymakers around the world have been increasingly divided over future borrowing rate policies in recent weeks as recent inflation data remain ambiguous and support both cases of raising or decelerating rates. I’m here.

While many investors are in favor of hawkish policies for now, others are starting to worry.

Policy Bathos claims headline inflation is already 2 percentage points below its peak, which could indicate a further drop in inflation.

Lagarde pointed to the sharp drop in natural gas prices in recent weeks despite the ban on gas imports from Russia as a positive sign.

“The economy has proven more resilient than expected and should pick up in the coming quarters,” she said.

Recession fears in Europe

Meanwhile, the eurozone remains on the brink of recession, with credit growth likely to see its biggest drop since the bloc’s last major debt crisis in 2011, and rate hikes slowly impacting the EU economy. suggesting that you are giving

However, if interest rates rise too high, it will limit economic growth. That’s because the Eurozone economy has slowed to his 0.1% growth rate in the last three months of 2022.

Lagarde acknowledged that “economic activity has slowed significantly” since mid-last year, and remains weak as global consumer demand slows and the Russian war in Ukraine continues to raise concerns. is expected.

Higher borrowing rates make it more expensive for consumers to make large purchases such as homes and cars, and for businesses to finance business expansion.

Consumer prices, which rose 8.5% year-on-year in the eurozone last month, are still historically high, but have fallen for the third consecutive month after hitting a record high of 10.6% in October.

This is well above the ECB’s inflation target of 2%.

Energy shortages continue to plague the continent

High energy prices, a major driver of European inflation, are caused by shortages caused by anti-Russian sanctions against Ukraine.

So far, governments in the European Union and the UK have delivered billions of euros and pounds in relief to ease the financial pressures from high natural gas prices. Natural gas prices are driving up energy costs for millions of households, impacting food and retail prices.

Businesses and industries are suffering, especially in Germany, Europe’s largest economy, as rising energy costs cut operating costs.

Energy prices have fallen slightly from last year’s all-time highs as a warmer winter reduced shortages and rations after countries in the bloc were able to find alternative suppliers, but prices remained below the same country’s 3 It stays double. period of a year ago.

“It is important that we begin to scale back these measures quickly in concert as energy prices fall,” Lagarde said.

Over the past few months, trade unions across Europe have staged strikes demanding wage increases to match the rising cost of living, while other civilians have protested the EU’s stance on Russia and reduced living standards. They blame sanctions for the deterioration.

Reuters and Associated Press contributed to this report.