December 3, 2022

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European Central Bank raises interest rates again

European Central Bank raises interest rates again

The European Central Bank imposed another big interest rate hike on Thursday, as policymakers tried to cool record high inflation in the region.

The central bank, which sets monetary policy for the nineteen countries that use the euro, raised interest rates by three quarters of a percentage point, Matching the previous increase Last month. After a slow start to raising prices – Increase in July It was the first in more than a decade – the bank said it quickly tightened its stance on its policy as inflation proved worse and more stable than the bank had expected.

Consumer prices rose 9.9 percent on average in the euro zone in September from the previous year, the fastest pace on record, driven by energy and food prices.

“Inflation remains very high and will remain above target for a long time,” central bank chief Christine Lagarde said on Thursday. She said that the bank’s policy stance aims to weaken the forces that drive demand upwards and protect against the risks of inflation expectations turning upwards constantly.

Lagarde told a news conference in Frankfurt that policy makers expect to raise interest rates further as they seek to bring inflation back to the bank’s 2 percent target.

The challenges facing central bankers have increased in the past few months as lawmakers have taken more steps to protect households and businesses from rising prices. Central bankers warned that fiscal policy should not conflict with monetary policy. Britain has become an international example of this danger. last week, Liz Truss resigned as Prime Minister After the tax cuts sparked turmoil in the financial markets.

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European governments were at odds on how they should respond to rising energy prices, with wealthier nations benefiting from their better fiscal positions to spend more. Germany recently announced a €200 billion ($201 billion) aid plan for homes, businesses and industries.

The ability of central bankers to control inflation has been severely tested over the past year. There was once an expectation that high inflation would pass quickly, especially when it was driven primarily by high and volatile energy prices that policy makers could not control. But economies faced a series of economic shocks that pushed central banks into action.

While inflation is well above the central bank’s 2 per cent target, analysts are already questioning how much higher policy makers in the eurozone will be able to raise interest rates as recession approaches.

The bank deposit rate, which is what banks get for depositing money with the central bank overnight, was raised to 1.5 percent on Thursday and the new rate will come into effect on November 2. The bank also raised its other key lending rates by three: quarters of a point. It remains a relatively loose political position compared to some of its international counterparts. In the United States, the Federal Reserve’s policy target is between 3 and 3.25 percent. The Bank of England’s key interest rate has been set at 2.25%.

ECB officials have said they need to reach at least a neutral rate, as policy neither stimulates nor restrains economic growth, but estimates of what this neutral rate differs and the central bank has not disclosed its own estimates.

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The future course of inflation is increasingly uncertain, although the rate is expected to remain above the central bank’s target for the next two years. Natural gas prices in EuropeWhich severely affected the inflation rate, it eased recently as the weather remained relatively warm and governments succeeded in filling storage facilities. But prices are still double what they were a year ago, and analysts say there is still a risk that prices could rise sharply again. Prices are higher in winter futures, when stocks are expected to dwindle.

Policymakers are also keeping a close eye on how much companies are raising their prices and workers are demanding higher wages in response to rising inflation. For now, these second-round effects seem contained but it can be very difficult to control inflation once expectations set in those prices continue to rise.

The euro may be a source of comfort for policy makers. On Wednesday, it rose again above $1 for the first time in more than a month. Officials have been vigilant about how a weak euro has exacerbated inflationary pressures by increasing the cost of imports.

On Thursday, the bank also announced a change in the terms of the loans it provided to banks during the pandemic. They are designed to give banks cheap access to money and encourage lending to businesses and households.

But with inflation soaring and the central bank raising interest rates, loans were providing European banks with an offsetting opportunity to make money from their central bank holdings. Starting next month, interest rates on these loans will rise and the bank is urging early repayment.

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