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In an effort to combat inflation, the European Central Bank has announced a record-high increase in interest rates for the eurozone.
As energy prices increase, prices in the bloc are rising at their fastest rate in fifty years.
The ECB increased all of its main interest rates by three-quarters of a percentage point and issued a warning that it was likely to hike rates once more this year.
The bank hiked interest rates in July for the first time in more than 11 years. According to the ECB, following making its most recent decision, price pressures have continued to grow and spread throughout the economy.
The European Central Bank increased its primary refinancing rate, which banks must pay when borrowing money from the ECB, from 0.5% to 1.25% and its key deposit rate, which it pays interest on deposits, from zero to 0.75%.
Raising interest is to make borrowing more expensive, which should encourage people to borrow less, save more, and spend less. This, in principle, helps prevent price increases.
Higher energy prices are the main cause of inflation worldwide. Prices were growing more swiftly as economies recovered from the effects of the coronavirus pandemic, but they increased further as a result of Russia’s conflict in Ukraine.
Christine Lagarde, president of the ECB, claimed that the central bank was powerless to reduce the high cost of electricity.
She continued by saying it would be recessionary if gas prices kept rising quickly.
Gas rationing across the entire euro area and a recession in 2023 are two scenarios the ECB envisions if Russia entirely cuts off gas supplies to the EU and cannot secure alternative gas supplies from Asia, Norway, and the US, Ms. Lagarde said.
Markets continue to anticipate a further half-point increase at the ECB meeting in October because the bank’s statement specifically stated that additional rate hikes would be required.
Interest rates have consistently being increased by other countries
According to Eurostat, the inflation rate in the euro area is projected to increase to 9.1% in August from 8.9% in July.
The ECB is “playing catch up,” according to Janet Mui, head of market analysis at asset manager Brewin Dolphin, with the US Federal Reserve and the Bank of England, which have already been raising rates.
The ECB has predicted inflation rates for the eurozone of 8.1% this year, 5.5% in 2023, and 2.3% in 2024, although these predictions are highly questionable given the volatility of gas prices.
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Some economists foresee a slump in the eurozone due to rising energy prices eroding purchasing power.
Some policymakers have discussed a recession, and the ECB’s revised forecasts also indicate much slower growth in the upcoming years.
The ECB predicts that following a recovery in the first half of 2022, recent statistics indicate a significant deceleration in economic development in the euro area, with the economy anticipated to stagnate later in the year and in the first quarter of 2023.