On Thursday, the European Central Bank increased its interest rate by 75bps, the largest increase ever. The European bank follows the footsteps of other banks that have hiked interest in 2022.
ECB Increases Lending Interest Rate By 75bps
The 25 members of the bank’s governing council increased the benchmark for the 19 nations using the Euro currency. Usually, the ECB moves the interest rate by a quarter-point.
The ECB has never raised its interest rate by 75bps (three-quarters) since the inception of the Euro in 1999. Christine Lagarde, the president of the ECB, said the central bank would continue to raise the rate as the inflation continues.
In July, the central bank endorsed a half-point increase at a meeting for the first time in 11 years. According to Lagarde, the continent’s economy would slow down greatly throughout this year.
Additionally, she predicted that energy prices would continue to increase. The bank’s latest hike aims to raise borrowing costs for governments, businesses, and consumers.
In theory, this would cause such entities to reduce their investment and spending. Consequently, this would reduce the demand for products, thereby cooling off increasing consumer prices.
Also, analysts believe this interest hike would strengthen the credibility of the bank after it had underestimated the duration and severity of the inflation.
As of August, inflation in the region increased to a record of 9.1%. Economists believe this will enter double digits soon.
Russia Threatens To Shut Down Gas Supply Europe Completely
Meanwhile, the Russia-Ukraine war has fueled the inflation rate in the continent. Recently, Russia cut off the major gas supply pipeline to Europe.
Natural gas is used to run factories, generate electricity, and also heat up homes as the winter period draws nigh. As a result, Russia’s action has increased energy prices by 10x.
Officials in Europe accused Russia of using these tactics to pressure the EU for supporting Ukraine during the February crisis. However, Russia noted that it had to shut down the pipeline due to technical difficulties.
Also, the Russian government has threatened to completely cut off the power supply if the West does not remove sanctions. According to economists, the ECB’s latest action could lead to a recession before the end of the year.
They believe this recession would happen as inflation has spiked the price of consumables, including groceries and utility bills.
Meanwhile, the ECB’s new benchmark to lend money to banks is currently 1.25%. The benchmark for the US Fed is between 2.25%-2.5% after increasing interest rates several times.
For the Bank of England (BoE), the benchmark stands at 1.75%, while that of Canada’s central bank is 3.25% after it increased its interest rate by three-quarters on Wednesday.