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ECB says Interests Rates will Go up so Country Could Counter Effects of Inflation

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Photo Credit: ECB

The European Central Bank said that it would raise interest rates to their highest level in order to help countries deal with the growing energy crisis. On Thursday, the ECB hiked interest rates by three-quarters of a percent and stated that another increase was very expected in the coming days.

Following the blowback with Russia, which resulted in supply cuts of gas entering European countries via major pipelines, primarily the Nord Stream 1, Europe has been pushing to keep up with rising energy demand. The situation is aggravated by the extreme heat that is sweeping the country.

Years after the ECB set it to zero in 2011, the rate is currently above the zero thresholds. This is the first time the Central Bank has set interest rates over 0 percent and outside the negative area. The ECB stated in a statement that it expects future rate hikes to occur.

“The Governing Council took today’s decision and expects to raise interest rates further because inflation remains far too high and is likely to stay above target for an extended period,” said the Central Bank.

Inflation in the UK is presently 9.1% as a consequence of rising prices of commodities like food and energy.

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The energy crisis only worsened by Russia-Ukraine conflict

When Russia declared war on Ukraine, Europe attempted to extricate itself from its dependence on Russian petroleum exports. In reality, the G7 countries have already expressed their displeasure with Russia’s continuous aggressive behavior towards its neighbor.

In retaliation, Russia shut off the supply of natural gas to numerous European nations, including Germany. As a result of the supply reduction, energy costs skyrocketed, putting pressure on the government to bump up its subsidy on businesses and people in order to compensate for the abrupt consequences of the supply cuts.

Economists warn that a European recession is imminent as a result of these circumstances. Inflation is at a decades-high, firms are recording poor sales and activity, and Germany, Europe’s largest economy, is not growing as well as hoped. Furthermore, the region’s gross domestic product may fall in the coming quarter.

The ECB also rules that many people are already foreseeing high inflation rates in light of the present economic position. The following spending and investment patterns of corporate leaders and individuals may be affected, causing the ECB to be concerned about not meeting its objective for the year.

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“Price pressures have continued to strengthen and broaden across the economy, and inflation may rise further in the near term,” the Central Bank said.

The ECB is contemplating that inflation rates could hit 8.1% on average in 2022. However, the central bank also anticipates the rate to fall considerably to 5.5% next year. Economic growth, meanwhile, is estimated to fall from 3.1% this year to 0.9% in 2023.

“There seems universal agreement that higher rates are required to prevent higher inflation becoming embedded, though [Russian] President Putin is creating a lot of slack in the European economy already,” said Kit Juckes, Societe Generale strategist.

According to ECB President Christine Legarde, a negative scenario in which European nations plunge into recession is feasible. Rationing, supply cutbacks, and climatic issues all contribute to this.

Holger Schmieding, Berenber’s chief economist, stated, “It still seems likely that, once the ECB realizes the depth of the recession that we expect to unfold, the ECB will put rate hikes on hold at some time in early 2023.”

Source: CNN

Opinions expressed by Economic Insider contributors are their own.

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