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An interest rate rise from the European Central Bank (ECB), its first for 11 years, was always nailed on.
Christine Lagarde, the ECB’s president, had already explicitly stated in June that the bank would be increasing its main policy rate by a 0.25 percentage points this month.
But the decision took on much greater significance when, on Tuesday this week, Reuters reported – citing two sources “with direct knowledge of the debate” – that the bank’s governing council would discuss a possible increase of 0.5 percentage points.
The euro surged by more than 1% against the US dollar on that news, which came just days after the single currency had fallen to below parity against the greenback for the first time in nearly 20 years.
So the only real issue was whether the ECB would raise by 25 or 50 basis points – and today it went for the latter.
It is a big, dramatic move from the ECB, which had not moved interest rates since September 2019, when it cut its main policy rate from -0.4% to -0.5%.
So interest rates in the eurozone are no longer negative for the first time in nearly three years. It reflects mounting concern across the eurozone over burgeoning inflation. Even after the Reuters report, most economists still expected only a quarter point rise. The euro rose by nearly 1% against the dollar immediately after the news.
In reality, the ECB really had very little choice. The bank, like the Bank of England, is mandated to target an inflation rate of 2% but inflationary pressures have been building up in the euro zone since the start of the year.
Consumer price inflation in the eurozone hit 8.6% in June, up from 8.1% in May, but in some eurozone countries it is already higher than that. For example, in Greece it is 12%, in Belgium it is 10.5%, in Spain it is 10% and in the Netherlands it is 9.9%.
In the Baltic states of Latvia, Lithuania and Estonia that border Russia, the rates are 19%, 20.5% and 22%…
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Source : skynews
