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European Central Bank may continue to raise interest rates as inflation continues to run high- China Daily

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European Central Bank may continue to raise interest rates as inflation continues to run high- China Daily

Xinhua News Agency, Frankfurt, June 15th(International Observation) The European Central Bank may continue to raise interest rates as inflation continues to run high

Xinhua News Agency reporter Shao Li

The European Central Bank held a monetary policy meeting on the 15th and decided to raise the three key interest rates in the euro zone by 25 basis points. Since the start of the rate hike process in July last year, the ECB has raised interest rates eight times in a row, totaling 400 basis points. Analysts pointed out that despite the sluggish economic growth in the euro zone, the expectation that the inflation rate will remain too high for a long time will make it difficult for the European Central Bank to suspend interest rate hikes. The European Central Bank may further raise interest rates in July in order to prompt inflation to fall.

According to the announcement issued on the same day, starting from the 21st of this month, the European Central Bank will raise the main refinancing rate, marginal lending rate and deposit mechanism interest rate to 4%, 4.25% and 3.5% respectively. The ECB will ensure that key interest rates in the euro zone reach a sufficiently high and restrictive level and remain there if necessary to achieve its medium-term target of inflation falling back to 2 percent in a timely manner.

At present, the inflation rate in the euro area has shown a downward trend, but the ECB expects that the inflation rate will remain at an excessively high level for a long time. According to Eurostat data, the overall inflation rate in the euro zone was 6.1% in May this year. The European Central Bank believes that although some inflation indicators have slowed down, inflationary pressures are still high, especially the core inflation rate that excludes energy, food, tobacco and alcohol prices is higher than previously expected.

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On the day of announcing the interest rate decision, the European Central Bank raised its inflation forecast for the euro area to 5.4% in 2023, and lowered its inflation forecast to 3% in 2024 and 2.2% in 2025.

In contrast to the continued interest rate hikes in the euro zone, the U.S. Federal Reserve Board announced on the 14th that it will maintain the target range of the federal funds rate of 5% to 5.25%. interest.

Carsten Brzeski, director of macro research at ING, believes that the core inflation rate in the euro zone will only approach the 2% target level in two years, and there are more reasons to continue raising interest rates. At the same time, the European Central Bank expects economic growth in the euro area to return to potential levels by the end of the year, which also leaves the door open for further interest rate hikes.

According to the revised data released by Eurostat on the 8th, the Eurozone economy fell into a technical recession at the beginning of this year, and the gross domestic product (GDP) fell by 0.1% month-on-month for two consecutive quarters. The “Financial Times” once wrote that the current economic data in the euro zone may weaken people’s confidence in the resilience of the euro zone economy, making the European Central Bank hesitant to continue to increase borrowing costs.

Friedrich Heinemann, an economist at the Center for European Economic Research, said the fact that the ECB has continued to raise interest rates despite the poor economic outlook shows that restoring price stability is its top priority.

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Regarding whether the European Central Bank will continue to raise interest rates in July, there were different voices within the European Central Bank. Those who support the suspension of interest rate hikes emphasize that there is an obvious lag effect in monetary policy, so the wait-and-see effect is more important. Opponents point to persistently high core inflation in the euro zone and the European Central Bank’s work to raise borrowing costs.

European Central Bank President Christine Lagarde said at the press conference that day that the current inflation rate is still too high and that rising wages are increasingly driving inflation. The ECB has not done its job of fighting inflation. She said there were “no plans to pause (rate hikes) under consideration at this time” and further rate hikes in July were “very likely” unless there was a material change in economic data.

BNP Paribas economist Spiros Andreopoulos expects the ECB to raise rates one last time in July and keep rates there for several quarters.

Dirk Schumacher, an economist at Natixis, said the European Central Bank’s move to raise inflation forecasts for the euro zone in 2023 has increased the likelihood it will continue raising interest rates in September. To avoid that, euro zone core inflation needs to fall significantly by September.

[Responsible editor: Yan Yujie]

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