The ECB took an Unprecedented Decision to Increase Interest Rates by 75 Basis Points
The European Central Bank (ECB) raises the main interest rate by 75 basis points, bringing it to 1.25%. Today's decision is an unprecedented increase in the bank's history and is prompted by accelerating inflation in the Eurozone.
More importantly, the ECB is also increasing by 0.75% the interest rate on commercial bank deposits with the ECB, which was 0% until now. This will have an immediate direct impact on the market and end users of financial services.
Although steep, the increase was fully expected. The ECB was late in deciding to tighten monetary policy in the eurozone, lagging well behind the central bank benchmark, the Federal Reserve. That is why the withdrawal of the heavy artillery is necessary at the moment.
Thus, the supremacy of the "hawks" in the bank's board over the "doves" is now increasingly visible. This is understandable, considering that the expectations are that next month we will see the threshold of 10% average inflation in the zone being exceeded - unprecedented levels. We remind you that the target level of the ECB is inflation of 2%.
However, in the communique accompanying the decision, it is written that "price pressures continue to grow and expand throughout the economy, and it is possible that in the short term inflation will rise further." This is a clear warning that inflation will be here for a long time and that the tightening policy will continue in the coming sessions.
The ECB delayed its decision for two reasons. First, because of the fear that economies not recovered from COVID will slow growth. Second - because the increase in the central interest rate will increase the interest rates on the debts of the most indebted economies in Europe - Italy, Greece, Portugal. The bank is even developing a special tool to help these countries deal with over-indebtedness.
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