The European Central Bank is set to raise interest rates for the first time in 11 years – but risks being left behind as peers move ahead in the fight against inflation
- The ECB will raise its base rate, probably by 0.25 percentage points
- But that would still leave the base rate in negative territory
- The Bank of England and the Fed began an aggressive fight against inflation
The eurozone’s central bank is set to raise interest rates for the first time in 11 years, but risks being left behind if peers move ahead in the fight against inflation.
The European Central Bank (ECB) will raise its key rate on Thursday, probably by 0.25 percentage points.
But that would still leave the base rate in negative territory, at minus 0.25 percent, meaning lenders are effectively required to keep money at the ECB.
Christine Laggard? The president of the ECB has been slow to act on rates
On the contrary, organizations such as the Bank of England and the Federal Reserve System of the United States have launched an aggressive fight against the fervent rise in the cost of living.
The Bank of England raised its own base rate at five monetary policy meetings to 1.25 percent. It is planned to raise rates again in August. And the Fed recently opted for a 0.75 percentage point hike — the largest since 1994.
Martin Weder, senior economist at Swiss lender ZKB, said: “The ECB is well behind the curve and risks losing credibility if it does not take decisive action.”
He argued that the central bank, headed by French businesswoman Christine Lagarde, should “rapidly abandon negative interest rates” and raise them by 0.5 percentage points. Central banks raise interest rates when inflation starts to overheat.
Higher rates should in theory encourage households and businesses to save rather than spend, helping to contain prices. But it also dampens economic activity and could lead the global Covid recovery to recession.
Economists began to worry that aggressive rate hikes could accelerate a period of rising unemployment and falling living standards.
But rampant inflation is already hurting families as wages are eaten away by rising prices for essentials like food and energy.
UK inflation hit 9.1 percent in May, a 40-year high. Economists hope June data due on Wednesday will show cost-of-living growth stabilizes before it is expected to top 11 percent in October.
Inflation in the US surprised economists, coming in at a stronger-than-expected 9.1 percent in June, while in the euro zone it was expected to rise from 8.1 percent in May to 8.6 percent last month.
The European Central Bank is planning its first rate hike in a decade
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