Photo Credit: ECB
The European Central Bank announced that it would increase the rate hike to the maximum so countries could fend off the worsening energy crisis. The ECB hiked the rates by three-quarters of one percent on Thursday, and they added that a higher rate would be highly likely in the coming days.
After the fallout with Russia leading to the supply cuts of gas coming into the European countries through major pipes, primarily the Nord Stream 1, Europe has been scrambling to catch up with the increasing demand for energy. The condition is only exacerbated by the intense heat being felt throughout the country.
The rate is now above the zero percentage, years after the ECB increased it to zero in 2011. The move marks the first time the Central Bank benchmarked the interest rates above zero percentage and the negative territory. According to a statement, the ECB said that they are expecting more increases to happen.
“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,” added the ECB.
Due to the soaring prices of commodities like food and energy, inflation in the UK is now at 9.1%.
The Russian war affecting the energy crisis
When Russia waged war against Ukraine, Europe tried to rid itself of the dependency on Russian fuel exports. In fact, the G7 countries have already expressed their dissent against Russia’s continued assault on its neighbor.
In retaliation, Russia cut off its natural gas that supplies many European countries, including Germany. Consequently, the slashing of the supply spelled a massive uptick in the prices of energy, which pressured the government to increase its subsidy on establishments and households so it could neutralize the sudden effects of the supply cuts.
Because of these factors, economists warn that a recession in Europe is possible. Inflation is decades high, with businesses reporting low sales and activity, and Europe’s largest economy, Germany, is not performing well as expected. In addition, the gross domestic product of the region could decrease in the next quarter.
The ECB is also ruling out that many are already expecting high inflation rates due to the current economic conditions. The subsequent spending and investment habits of company executives and citizens could be altered, worrying the ECB in not making its target for the year.
“Price pressures have continued to strengthen and broaden across the economy, and inflation may rise further in the near term,” said the ECB.
The ECB is now looking at possible higher inflation rates for the region, at an average of 8.1% in 2022. The central bank also expects the rate to go down sharply next year, at 5.5%. However, economic growth is expected to decrease 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,” said Societe Generale strategist Kit Juckes.
ECB president Christine Legarde made remarks that a downside scenario is possible that sees the European countries go into recession. This comes from rationing, supply cuts, and climate crises.
Chief economist at Berenber, Holger Schmieding, 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.”
Opinions expressed by CEO Weekly contributors are their own.