The European Central Bank (ECB) is expected to raise its base rate by 0.25 percentage points on Thursday. The bank raised its interest rates for the first time in 11 years, but it also risks falling behind as peers continue to combat inflation. The eurozone’s interest rates were last hiked in 2011. The future is becoming increasingly bleak as inflation continues to rise and GDP slows considerably.
The most recent eurozone inflation estimate was 8.1%, which was far beyond the ECB’s aim. The ECB also reduced its eurozone growth prediction for 2022 from 3.7% to 2.8%, and from 2.8% to 2.1% for 2023. In the United States, the Federal Reserve has hiked interest rates twice this year, while the Bank of England has boosted interest rates to 1%, the highest level in 13 years.
Inflationary pressures, the euro’s fall below parity with the dollar, and the perception that policymakers are behind the curve are all arguments for a large rise on Thursday. Even if European Central Bank officials deny the possibility of beginning interest-rate rises with a half-point increase this week, there is still a justification for it.
Higher interest rates should, in principle, encourage consumers and companies to save rather than spend, so helping to keep prices under control. However, this dampens economic activity and may cause the world’s Covid rebound to stall.
Economists are concerned that rapid rate rises would result in increased unemployment and deteriorating living standards. However, excessive inflation is already creating hardship for households, as increasing food and energy prices are eating away at incomes.
In May, UK inflation reached 9.1%, a 40-year high. Economists are hopeful that June’s statistics, which are due out on Wednesday, will show the cost-of-living stabilising before it reaches 11% in October.
