ECB Raises Interest Rates Again Amid Inflation Concerns

In a move that further escalifies an ongoing trend, the European Central Bank (ECB) is set to increase the interest rate for the ninth consecutive time.

by Faruk Imamovic
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ECB Raises Interest Rates Again Amid Inflation Concerns

In a move that further escalifies an ongoing trend, the European Central Bank (ECB) is set to increase the interest rate for the ninth consecutive time. This announcement comes hot on the heels of the United States, where the Federal Reserve also just announced another hike in interest rates.

Unrelenting Measures to Quell Stubborn Inflation

Last month saw the ECB elevate interest rates by four percentage points, with today's new announcement marking a further rise of 0.25 percent. There remains an air of uncertainty about whether this increase represents the last in the line of hikes, or if another one is poised to be announced come September, in an attempt to better manage inflation.

According to Reuters, indications are strong that the series of interest rate hikes is nearing its conclusion. The ECB, however, is grappling with the issue of a stubbornly high inflation rate that's reducing at a slower pace than anticipated.

Current projections suggest that the inflation rate will only manage to dip to two percent by 2025. Inflation has been primarily stoked by escalating energy prices, catapulting the inflation rate in the Eurozone perilously close to an all-time high.

And worryingly, projections for the month suggest an even faster pace of growth. Salomon Fiedler from Berenberg stated, "We see a 60% probability that the ECB will hike again by a final 25bp on 14 September." He further noted, "Softer data such as the drop in the Eurozone composite PMI indicate a rising chance that the central bank will stay put in September already."

Unprecedented Low Unemployment and Rising Wages

The Eurozone is currently witnessing a record low unemployment rate, leading to concerns that wages might see a significant increase in the coming years.

Unions are championing for this rise in wages, citing the mounting inflation as the driving factor. This sentiment fuels speculations that the ECB might be gearing up for another interest rate hike in September. However, Marco Wagner from Commerzbank takes a slightly contrary view: "The ECB is unlikely to raise interest rates further in September." He elaborates, "However, the stubborn upward pressure on prices in the services sector that is emerging is likely to argue against lowering interest rates next year." In parallel, the Federal Reserve, serving as the United States' central bank, has recently increased its interest rate, pushing it to the highest point seen in the last 22 years. This comes following a pause in rate increases last month, and bumps up the interest rate from 5.25 to 5.5 percent.

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