European Central Bank Raises Interest Rates for the Ninth Consecutive Time
Frankfurt, Germany – In response to high inflation and a challenging external environment, the European Central Bank (ECB) has decided to raise interest rates for the ninth time since July 2022. The cumulative rate hike now stands at 425 basis points. This move reflects the ECB’s determination to seek stability amidst a Eurozone economy facing the dilemma of high inflation and weak growth.
The decision was made at the ECB’s recent monetary policy meeting on July 27. Starting from August 2, the main refinancing, marginal lending, and deposit key interest rates will be raised to 4.25%, 4.50%, and 3.75% respectively. Additionally, the ECB plans to reduce interest payments on reserves and set the minimum interest rate on reserves to zero. This historic ninth consecutive interest rate hike confirms the ECB’s cautious and prudent policy considerations.
The main driving force behind the ECB’s decision is high inflation. Despite a slight decrease of 0.6 percentage points to 5.5% in June, the Eurozone’s inflation rate remains higher than the 2% warning line established by the ECB. The European Central Bank expects inflation levels to drop within this year but anticipates difficulties in achieving a short-term inflation rate below 2%.
The external environment further complicates the Eurozone’s economic outlook. Global economic and trade activities are weakening, and the ongoing Russia-Ukraine conflict poses threats to the European economy. Moreover, the spillover effects of the US banking debt crisis continue to impact Europe. European Central Bank President Christine Lagarde emphasized that the inflation level in the future is highly uncertain due to external factors, including geopolitical conflicts and systemic financial risks.
The successive interest rate hikes have taken a toll on the Eurozone’s real economy. Despite limited success in curbing inflation, the monetary tightening policy has negatively affected the service industry and manufacturing sector, leading to weak economic growth. Consequently, major economies like Germany and France have encountered difficulties, with some market analysts predicting a possible recession in the second half of 2024.
Lagarde’s recent statement signaling that interest rates will remain relatively high for a period of time suggests the ECB’s cautious approach. Looking ahead, the ECB is expected to adopt a more flexible monetary policy, taking into account the specific economic developments in the Eurozone. While closely following the Federal Reserve in terms of interest rate hikes, future monetary policy between the US and Europe may diverge given their differing economic fundamentals.
Considering the high risk of a Eurozone economic recession and the financial risks from the US banking industry, the ECB will need to maintain its strength and prioritize stabilizing inflation. The next monetary policy adjustment in September is uncertain, but the European Central Bank has ruled out the possibility of interest rate cuts.
As the Eurozone navigates through this challenging period, it is crucial for the ECB to strike a delicate balance between containing inflation and promoting economic growth.
Source: Economic Daily
Author: Chen Bo