Devendra Kumar
The European Central Bank has announced another interest rate rise, its eighth consecutive increase since July 2022, in an effort to curb inflation. The rate hike, which took the benchmark rate to 3.5%, is part of a swift campaign to tighten credit flow to the economy and bring inflation back down to its target of 2% from 6.1%. According to the ECB, inflation has been coming down, but it is projected to remain too high for too long.
The decision was widely anticipated, and many analysts believe another quarter-point hike is likely at the bank’s next meeting on July 27. ECB President Christine Lagarde’s remarks at a news conference will be closely watched for clues on when rate increases might finally come to an end. Despite the rate hike, the ECB’s own projections acknowledge that controlling inflation will take months longer, a stark contrast to last year’s double-digit peak.
Central banks around the world are grappling with the challenges posed by price spikes, which have squeezed households and businesses with higher bills for basics such as food and rent. The US Federal Reserve, for example, has suspended its series of rate hikes to assess the impact on economic growth and jobs. While some central banks, such as those in Australia and Canada, have resumed rate increases, others are taking a more cautious approach to avoid plunging their economies into further trouble.
In Europe, the economy contracted slightly in the last months of 2022 and the first three months of this year, which could be classified as a recession. However, the Euro Area Business Cycle Dating Committee has found no recession at its last assessment in March and will revisit the question in November. Consumer prices started rising as the global economy bounced back from the Covid-19 pandemic and created supply chain bottlenecks. Oil and natural gas prices also spiked due to the Russia-Ukraine conflict, leading to higher prices for food and fertilizers.
While some pressures are starting to ease, the initial burst of inflation is still being reflected in higher wage demands and prices for services. Energy prices have fallen in Europe in recent months, but home prices in the region started to fall in the last months of 2022, the first dip since 2015. This could be a sign that the ECB’s policies are feeding through to the economy, as mortgage costs deter homebuyers. The ECB’s campaign to crush inflation shows no signs of slowing, with the bank likely to press on with rate hikes for the foreseeable future.