The ECB raises interest rates by 0.5%, but another hike is already expected. Lagarde: “Strong uncertainties”

The ECB raised interest rates beyond expectations, confirming that inflation concerns outweigh fears of recession risks for the time being. Rates rose 50 basis points to zero percent, while analysts had expected 0.25 percent. Not only that, but the Eurotower board has promised more rate hikes, perhaps as early as the next meeting on 8 September. In fact, the press release explains that with inflation already approaching double digits, given the risk of consolidating above the 2% target, it is necessary, in summary, to act, also considering the fact that a possible supply shortage of gas next winter could drive up prices even further.

The euro, which dropped to a two-decade low against the dollar to hit par earlier in the month, rose about half a percentage point on the announcement of a new anti-spread shield – a new bond purchase, called the Instrument Protection Act, which aims to contain rising borrowing costs and limit financial fragmentation – has driven eurozone bond yields up. In Italy, the ten-year yield is close to 3.7%. The 50 basis point increase – loans and floating rate loans, hence mortgages, will be more expensive – still leaves the ECB still lagging behind its counterparts, especially the Fed, which has raised rates by 75 basis points a month. change next week. But the eurozone is more exposed to war in Ukraine, and the threat of cutting off Russian gas supplies could plunge it into recession, leaving policymakers with the dilemma of balancing growth and inflation considerations.

ECB President Christine Lagarde spoke at the press conference following the Governing Council meeting: “In the eurozone economic activity slows down while” Russia’s unwarranted aggression weighs on growth. There are strong uncertainties in the outlook, even as post-Covid reopenings support spending, while consumption is driven by household savings during the pandemic and a stronger labor market. Prolonging the war carries a significant downside risk. We expect inflation to remain at undesirably high levels for some time due to continued pressures on energy and food prices. However, energy prices should stabilize, while bottlenecks should ease.”

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