European Central Bank set to hike rates of interest for first time in 11 years – but risks getting left behind as peers push ahead in fight against inflation
- ECB will bump up its base rate by a probable 0.25 percentage points
- But this may still leave its base rate in negative territory
- Bank of England and Fed have launched aggressive fight against inflation
The eurozone’s central bank is about to hike rates of interest for the primary time in 11 years – but risks getting left behind as peers push ahead within the fight against inflation.
The European Central Bank (ECB) will bump up its base rate on Thursday by a probable 0.25 percentage points.
But this may still leave its base rate in negative territory, at minus 0.25 per cent, meaning lenders are effectively being charged to maintain money with the ECB.
Christine Laggard? The ECB president has been slow to act on rates
In contrast, the likes of the Bank of England and the US Federal Reserve have launched an aggressive fight against the red-hot rise in the price of living.
The Bank of England has lifted its own base rate at five consecutive monetary policy meetings to 1.25 per cent. It is about to hike rates again in August. And the Fed recently opted for a 0.75 percentage point rise – its biggest since 1994.
Martin Weder, a senior economist at Swiss lender ZKB, said: ‘The ECB is much behind the curve and risks losing its credibility by not taking decisive motion.’
He argued that the central bank, headed by French businesswoman Christine Lagarde should ‘rapidly abandon negative rates of interest’ and forge ahead with a 0.5 percentage point hike. Central banks lift rates of interest when inflation begins to overheat.
Higher rates should, in theory, encourage households and businesses to avoid wasting quite than spend, helping to maintain a lid on prices. But this also puts a dampener on economic activity, and will throw the world’s Covid recovery right into a recession.
Economists have begun to fret that aggressive rate hikes could precipitate a period of rising joblessness and falling living standards.
But rampant inflation is already causing pain for families, as wages are being eaten up by rising prices of essentials resembling food and energy.
UK inflation hit 9.1 per cent in May, a 40-year high. Economists are hoping that June’s figures, as a result of be released on Wednesday, will show the rise in the price of living stabilising before it is anticipated to surpass 11pc in October.
Inflation within the US surprised economists by hitting a higher-than-expected 9.1 per cent in June, while within the eurozone it is anticipated to rise from 8.1 per cent in May to eight.6 per cent last month.