ECB declares report fee hike and indicators new highs for upcoming conferences

ECB declares report fee hike and indicators new highs for upcoming conferences

More pessimistic about the European economy, ECB revises growth forecasts downwards and inflation upwards

O European central bank (ECB) increased its three interest rates by 0.75 percentage point in a decision this Thursday, 8. The interest rate hike was the most aggressive in the ECB’s history. As a result, the interest rate applicable to the permanent deposit facility, considered the most important in the Euro Zone, rose from 0% to 0.75%. The interest rate applicable to the main refinancing and liquidity-providing operations increased to 1.25% and 1.50%, respectively.

  • Deposit facility interest rate: 0.75%
  • Interest rate on main refinancing operations: 1.25%
  • Liquidity-providing interest rate: 1.50%

As in the last meeting, the ECB opted for a more aggressive adjustment than expected by investors. Before the announcement, the market was divided between an adjustment of 0.75 percentage point and 0.50 pp, as performed in the previous decision.

The contractionary turn should not stop here. “The Governing Council (…) expects to continue raising interest rates, because inflation remains too high and is likely to remain above target for an extended period,” said Thursday’s statement.

More inflation and less growth

The ECB was even more pessimistic about the inflationary dynamics of the Euro Zone, revising its projections for this and the next two years. ECB economists’ expectations for the Consumer Price Index (CPI) for this year jumped from 6.8% to 8.1%. Estimates for the 2023 CPI rose from 3.5% to 5.5% and from 2.1% to 2.3 for the 2024 CPI. The Eurozone’s annual CPI ended August at 9.1%.

“Price pressures continued to gain strength and spread to the economy as a whole, with inflation likely to rise again in the short term”, said the ECB. The communiqué also cites food prices, demand pressures due to the economic reopening and “strangulation” of supply as reasons for the bloc’s high inflation.

More inflation and lower business and consumer confidence due to “Russia’s unwarranted aggression against Ukraine” also led the ECB to revise its growth forecasts for the coming years. The ECB now estimates GDP growth for 2023 at 0.9% and 1.9% in 2024. The previous expectation was 2.1% for 2023 and 2024. The projection for 2022 is for GDP to end with 3, 1% increase, which would represent a slowdown in relation to the second quarter annual GDP of 4.1%.

Source: Exam

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