European Central Bank is Ready to Fight Inflation, but with Higher Interest Rates

The European Central Bank declared that it would raise interest rates as much as possible to help nations combat the escalating energy crisis. On Thursday, the ECB increased interest rates by three-quarters of one percent and stated that an increase was quite likely to occur in the near future.

Europe has been rushing to keep up with the rising demand for energy since the rift with Russia caused supply cuts of gas entering the continent through significant pipes, particularly the Nord Stream 1. The extreme heat being experienced around the nation only makes the problem worse.

Years after the ECB raised it to zero in 2011; the rate is already higher than zero percent. With this action, the Central Bank benchmarked interest rates over zero percent and outside the negative region for the first time. Furthermore, the ECB reportedly stated in a statement that they anticipate more increases.

“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,” the ECB said.

Inflation in the UK has reached a 9.1% level due to the skyrocketing costs of essential goods like food and electricity.

The Russian-Ukranian war affected the energy crisis

When Russia invaded Ukraine, Europe tried to lessen its reliance on Russian fuel shipments. In reality, the G7 nations have already voiced their opposition to Russia’s ongoing aggression against its neighbor.

In retaliation, Russia shut off the natural gas supply that Germany and other European nations depend on. Therefore, the reduction in supply led to a sharp increase in energy costs, which put pressure on the government to raise its subsidy for businesses and people in order to offset the rapid consequences of the supply reductions.

Economists caution that Europe’s recession is conceivable due to these factors. Businesses are reporting poor sales and activity, inflation is at a decades-high level, and Germany’s economy is not functioning as smoothly as anticipated. The region’s gross domestic product may also contract in the upcoming quarter.

According to the ECB, many people already anticipate experiencing high inflation rates due to the present financial situation. Therefore, the ECB is concerned that by missing its annual goal, corporate leaders and people’s ensuing spending and investing patterns may change.

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

At an average of 8.1% in 2022, the ECB is now considering the possibility of higher inflation rates for the area. The central bank anticipates the rate dropping significantly to 5.5% next year. However, economic growth is anticipated to slow from 3.1% this year to just 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,” Societe Generale strategist Kit Juckes said.

According to ECB president Christine Legarde, there is a chance that the European Union may experience a recession. This results from supply shortages, rationing, and environmental catastrophes.

Holger Schmieding, the head economist at Berenber, said: “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