Reported by Consejeros Editorial Team
Three years on, the European Central Bank (ECB) has decided to raise key interest rates by 25 basis points, from 2% to 2.25%. The decision is based primarily on the consequences of the conflict in the Middle East and the closure of the Strait of Hormuz.
“The ECB’s rise in official interest rates came against a backdrop of stagflation. The move was also intended to avoid the risk of ‘falling behind’. Given the scale of the current energy crisis, it was not possible simply to ignore it. Without a rate hike, rising short-term inflation expectations could have started to influence longer-term expectations,” explains Christian Hantel, Head of Global Corporate Debt at Vontobel, following this move by the central bank.
Official interest rates are now close to the neutral level, leaving some scope for further rises before they become restrictive.
‘Depending on how long the Strait of Hormuz remains closed and the severity with which the energy crisis and supply chain disruption affect Europe, there could be another hike in September. However, the weak momentum of economic growth in Europe makes a prolonged cycle of hikes unlikely,’ adds Hantel.
In its statement on preserving policy options, the ECB counters the market’s ‘hawkish’ expectations of two further rate rises before the end of the year.
“We stand by our view that this rise is a one-off. Although there is a clear risk of further rises, particularly if the war with Iran escalates,” concludes Felix Feather, an economist at Aberdeen Investments.
