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Saturday, March 25, 2023

ECB Raises Rates by Unprecedented 75 Bps to Fight Inflation

The zero per cent deposit rate rise will ultimately range between 50 and 75 basis points, with estimates currently tending towards a larger increase but not with full certainty

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GERMANY: The European Central Bank raised its key interest rates by an unprecedented 75 basis points on Thursday and signalled further hikes, prioritising the fight against inflation even as the bloc’s economy is heading for a likely winter recession.

Policymakers are scurrying to maintain a lid on the bloc’s most harmful run of price growth in nearly half a century as it devours household savings and drags down company output out of concern that sky-high inflation is becoming entrenched.

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The zero per cent deposit rate rise will ultimately range between 50 and 75 basis points, with estimates currently tending towards a larger increase but not with full certainty.

Regardless of the outcome, the bank’s course of action will be clear. The larger move would represent the largest increase in the ECB’s benchmark rate in history.

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Since price pressures are continually exceeding even the most gloomy projections, additional increases are anticipated in the upcoming months.

Markets currently estimate that there is a greater than 80% possibility of a 75 basis point increase as a result of hawkish remarks from conservative policymakers. The higher increase is likewise predicted by a thin majority of the economists surveyed by Reuters.

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Paul Hollingsworth, an economist with BNP Paribas, said, “With the hawks continuing to hold the upper hand, we think the ECB will deliver a 75 basis point increase.” He continued, “We now expect a more front-loaded tightening cycle that takes the deposit rate up to a terminal rate of 2% by the end of the first quarter.”

High energy costs will reduce purchasing power and almost probably cause a recession in the union, which might be made worse by an active ECB, especially when borrowing costs rise for governments as they attempt to aid those who are most impacted.

Several policymakers, including board member Fabio Panetta and the head of the Greek central bank Yannis Stournaras, have argued for a smaller move. A big hike after a decade of ultra-low rates also goes against the ECB’s guidance for gradualism.

“We expect to raise interest rates further, because inflation remains far too high and is likely to stay above our target for an extended period,” ECB chief Christine Lagarde said, adding that Thursday’s decision was unanimous.

ECB chief Christine Lagarde; Photo Credit: Pinterest

“We think it will take several meetings,” she said. “How many is several? It’s probably more than two, including this one, but it’s probably also going to be less than five,” Lagarde said, suggesting that rate hikes could continue into early 2023.

Rate increases now will have an impact on the economy years from now, when inflation is already starting to decline on its own because central banks are helpless to combat inflation brought on by supply-side disruptions.

As the U.S. Federal Reserve is raising rates faster, a smaller move would also weaken the euro and further the inflationary process, making energy priced in dollars even more expensive.

Also Read: Liz Truss Stands by Europe as It Faces a Crucial Energy Crisis

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