ECB RAISES INTEREST RATE BY A HALF-POINT

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On 28 July, the European Central Bank (ECB) ended eight unbroken years of negative interest rates by boosting its key rate from -0.50 percent to zero, double the increase it had previously signaled.

It was the bank’s first rate hike in 11 years and the biggest since 2000.

The bank will continue to “normalize” rates at future meetings, it said in a statement. 

“Price pressures are spreading across more and more sectors,” ECB president Christine Lagarde told a press briefing. “Most measures of underlying inflation have risen further. We expect inflation to remain undesirably high for some time.”

Lagarde had all but guaranteed a quarter-point interest bump just a few days before the bank’s governing council met.

However, the sudden resignation of Mario Draghi, Italy’s prime minister and a former ECB president, coupled to new uncertainties over Russia’s natural gas shipments to the region, nudged officials to stiffen rates more. 

The bank also has created a “transmission protection instrument” that is intended to make sure interest rates do not rise dangerously high in heavily indebted countries, such as Italy and Spain.

The ECB’s governing council has retained the sole right to determine when the instrument is used.

The bank’s bump to interest rates is likely to have some, though marginal, effect on slowing inflation, Bert Colijn, senior European economist at ING, told the Associated Press.

“With a recession looming and inflation reaching new highs, the question is how the ECB will respond to an economy which is already cooling down,” he said.

The only remaining major economies with subzero interest rates are Denmark, Japan, and Switzerland.

More than 80 central banks have raised their interest rates this year. And today, Australia’s central bank brought its interest rate to six-year high percent after raising its benchmark 50 basis point to bring its interest rate to 1.85 percent. 

But on the grand scheme of rate hikes, it should be noted that they didn’t start raising rates until May, and the 25 basis point hike back then was the first in more than 11 years. 

Thus, with interest rates now at its highest point since May 2016 when the bank cut the rate from to 1.75 percent from 2 percent, even at this low level, the housing market that was artificially propped up with cheap money is quickly sinking. 

According to CoreLogic Australian home prices sank at the fastest pace since the Panic of ’08 and as rates continue to rise they noted the price slump is “likely to worsen.” 

TRENDPOST: The ECB’s new interest rate has more symbolic than practical value.  

With the region’s inflation at 8.9 percent in July, an interest rate of zero can have no leverage against rising prices.

The bank’s unwillingness to begin to raise its rate until now has rendered it irrelevant to the fight against inflation.

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