New Delhi: The European Central Bank is poised for another major interest rate hike even after the US Federal Reserve slowed its pace, a divergence that could mark Europe’s post-war economic crisis. Underlines the opening and could accelerate the euro’s rebound from recent lows against the dollar. ECB President Christine Lagarde has made it clear that the bank is likely to hike rates by half a percentage point at Thursday’s meeting and possibly at the next meeting. The Bank of England was also expected to hike by half a point on Thursday, in contrast to the Fed’s decision on Wednesday to slow rates by a quarter point.
The ECB began raising rates in July, four months after the Fed did, and from record low levels, including below zero for one of its key benchmarks. That means Europe’s Bank may have to go further before it feels rates are high enough to cool inflation even as economic growth slows. Officials said at their last meeting in December that rates would need to be raised significantly to control inflation, which in January reached 8.5 percent in the 20 countries that use the euro.
This is well above the bank’s target of 2 per cent, considered best for the economy. Market watchers will focus on Lagarde’s post-meeting news conference for any indication of how far the bank will go. Analysts say there is a possibility of an increase in prices in the next two meetings. Inflation is slowing in both the US and the Eurozone but is still at levels that are unacceptable to central banks whose mandate is to keep price increases under control.
The different pace of growth could have implications for the dollar, which recently slipped from near 20-year highs against the euro as markets began to believe the Fed is nearing peak rates while the ECB is increasingly raising them. Used to be. Rising rates in Europe increase returns on holdings denominated in euros, increasing demand for the currency and its exchange rate. Both central banks were making unusually large increases of a half or three-quarter point to quickly reach the top of inflation.
A stronger euro could help the ECB in its fight against inflation by reducing the cost of imports, especially crude oil and fuel, as they are priced in dollars. Analysts at Berenberg Bank said that as the rate differential between the Fed and the ECB narrows, the US dollar will continue its decline to a low overvalued zone of around $1.15 per euro in late 2023. The euro fell below $1 in July but has since risen to around 1.09 USD.
The ECB’s moves raise more concerns about economic growth. Higher interest rates affect the cost of borrowing, making it more expensive for consumers to buy homes or cars or for companies to obtain financing to expand. Growth in the European economy is stagnant, expanding just 0.1 percent in the last three months of last year as higher energy prices sapped consumer spending power and ate into company profits. Natural gas prices rose after Russia cut off most supplies to Europe amid war in Ukraine. They have fallen from all-time highs during the summer as Europe found other suppliers and warmer-than-expected weather eased the prospect of shortages and rationing. But they are still three times higher than when Russia ramped up troops along the border with Ukraine.
Bank officials say raising rates now would prevent even more painful credit restrictions that would be needed when inflation dents the economy on expectations of wage growth and future prices. The ECB’s benchmark for lending to banks before the meeting is 2.5 per cent. The rate on deposits left overnight by commercial banks is 2 per cent. The key US federal funds rate is at 4 after Wednesday’s meeting.