ECB braces for first interest rate hike in a decade
Right now the central bank deposit rate, which is what banks get for depositing money with the central bank overnight, is minus 0.5%, effectively a penalty intended to encourage banks to lend money rather than keep it at the central bank. The rate was first brought below zero in mid-2014 when the inflation rate fell towards zero.
“The European Central Bank is finally taking the fight against inflation risks seriously,” wrote Holger Schmieding, Berenberg Bank’s chief economist, in a note to clients, adding that the central bank has taken a “harder line ” provided that.
Equities in Europe fell, with the Stoxx Europe 600 index closing down 1.3%. Even though traders had bet on several interest rate hikes this year, government bonds also sold off, pushing up their yields, which are a measure of borrowing costs. The euro fell against the dollar.
But not all analysts agreed that the bank was doing enough. Commerzbank analysts wrote that policymakers were “acting too hesitantly” and that inflation would on average be “well above target” in coming years.
Valentin Marinov, a currency strategist at Credit Agricole, said the bank’s focus had shifted to tightening monetary policy and away from ensuring “favourable financial conditions”, a shift that weighed on investors. euro-denominated assets. The change could also “add to market concerns about the euro zone’s growth outlook”, he said.
The central bank updated its forecast for the economy on Thursday, painting a grim picture of rising inflation and deteriorating growth prospects as war in Ukraine disrupts trade and pushes oil prices energy and raw materials on the rise. Inflation also squeezes incomes, which weighs on consumer confidence.
The war “severely affects the economy of the euro zone, and the outlook is still surrounded by great uncertainty”, said Ms. Lagarde. At the same time, China’s zero Covid policy is restricting manufacturing and exacerbating supply bottlenecks. “As a result, companies face higher costs and disruptions in their supply chains, and their prospects for future production have deteriorated,” she said.