European Central Bank set to hike interest rates 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 likely 0.25 percentage points
- But this will 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 set to hike interest rates for the first time in 11 years – but risks getting left behind as peers push ahead in the fight against inflation.
The European Central Bank (ECB) will bump up its base rate on Thursday by a likely 0.25 percentage points.
But this will still leave its base rate in negative territory, at minus 0.25 per cent, meaning lenders are effectively being charged to keep 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 cost 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 set 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 far behind the curve and risks losing its credibility by not taking decisive action.’
He argued that the central bank, headed by French businesswoman Christine Lagarde should ‘rapidly abandon negative interest rates’ and forge ahead with a 0.5 percentage point hike. Central banks lift interest rates when inflation begins to overheat.
Higher rates should, in theory, encourage households and businesses to save rather than spend, helping to keep a lid on prices. But this also puts a dampener on economic activity, and could throw the world’s Covid recovery into a recession.
Economists have begun to worry 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 such as food and energy.
UK inflation hit 9.1 per cent in May, a 40-year high. Economists are hoping that June’s figures, due to be released on Wednesday, will show the rise in the cost of living stabilising before it is expected to surpass 11pc in October.
Inflation in the US surprised economists by hitting a higher-than-expected 9.1 per cent in June, while in the eurozone it is expected to rise from 8.1 per cent in May to 8.6 per cent last month.