The European Central Bank (ECB) will announce its first interest rate hike in more than a decade on Thursday, and economists say ECB President Christine Lagarde must weigh the possibility of triggering a debt crisis and a recession versus controlling runaway inflation.
Inflation in Europe jumped to 8.6% in June, prompting calls for interest rate hikes that economists hope will help keep rising prices in check. Stronger eurozone economies want aggressive rate hikes since inflation is their main concern, but weaker economies that have lots of debt that would become more expensive if rates rise oppose it, pointing to the difficulties of ‘have the same macroeconomic policies to govern the economies of many different countries, the Financial Times reported.
The European Central Bank is different from the US Federal Reserve because it manages monetary policy in a number of different countries. While tackling inflation by raising interest rates is a top priority for stronger European economies like France and Germany, others with higher debt levels could be plunged into crisis. if rates rise, said EJ Antoni, a regional economics researcher at the Heritage Foundation. the Daily Caller News Foundation.
“Countries that are heavily indebted and have a higher debt-to-GDP ratio are really hit when rates go up. These countries often pay interest on their debt on a monthly basis, and so when interest rates go up, their monthly payments go up, but they don’t even make a dent in the actual debt they owe, they just pay more and more to maintain it,” Antoni told DCNF.
What also complicates the ECB’s deliberations is a energy crisis in Europe due to Russia’s invasion of Ukraine which could lead the bloc into recession. Raising interest rates would also make this worse, the FT reported.
But at the same time, some Baltic countries are seeing price increases of more than 20%, prompting an ECB council member to condemn the ECB for not acting quickly enough to raise rates and fight the crisis. ‘inflation.
“Interest rates are our medicine and the timing and size of the dosage is of utmost importance,” the anonymous board member reportedly said.
Europe must therefore raise interest rates to avoid runaway and damaging inflation, but this could both crush indebted economies such as Greece, Italy, Portugal and Spain, and even plunge the whole the eurozone into recession if the energy supply disruptions are not resolved. .
“It’s an almost impossible situation,” Maria Demertzis, deputy director of the Brussels-based think tank Bruegel, told FT.
The European Central Bank is expected to raise rates this week for the first time in over a decade. But it could end this bullish cycle before the Fed. Why? Rapid slowdown in growth and risk of fragmentation of the euro zone. Our comment explains ➡️ https://t.co/nqAjnfDJrl pic.twitter.com/Kqn4POGgSk
—BlackRock (@BlackRock) July 18, 2022
So far, the ECB has been much more cautious in raising rates than central banks in other advanced economies, and the rate hike announced Thursday will likely be 0.25% or 0.5%, up from from the current rate of minus 0.5%, an all-time high. down, according The Wall Street Journal.
The Fed set rates in the United States between 2.25% and 2.5% and is expected to raise them by 0.75% this month, while the central bank of Canada raised rates last week by 1 % to 2.5%, reported the WSJ.
This wariness to drive up rates pushed the euro fall to its lowest level in 20 years and reach parity with the dollar last week.
The ECB did not immediately respond to the DCNF’s request for comment.
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