January 30, 2023

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On Thursday, the European Central Bank is expected to raise interest rates for the first time since 2011. Differences between Eurozone countries complicate the situation.

Christine Lagarde has been the central bank governor of the European Central Bank (ESB) since November 2019
published:

At its June interest rate meeting, the European Central Bank (ESB) kept the interest rate unchanged at -0.5 percent, but then announced that it would raise the benchmark rate by a quarter of a percentage point in July. They also announced that there would be another rate hike in September.

The rate meeting will take place on Thursday and the rate announcement will come at 14.15 Norwegian time.

Although the central bank announced a rate hike of 0.25 percent, some have begun to speculate whether the rate hike will be even higher. The US central bank (FED) came up with a “three-time rate hike” in June, from 0.75 percentage points.

According to Reuters, the European Central Bank is considering an increase of 0.25 or 0.50 percentage points. But Nordea Markets sticks to the previous signals:

– The media recently indicated that the European Central Bank will also discuss a major adjustment this week, but we believe that the ECB will still follow its previous guidance and raise the interest rate by 25 basis points, the brokerage house wrote in a report.

– After all, the ESB attached great importance to its previous directives. Several members of the central bank stressed that from a financing perspective, an increase of 25 or 50 basis points does not make much difference. But an increase of 50 basis points this week may have more significance for the ECB’s credibility, it was reported.

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Strong inflationary growth

One of the reasons for the expected rise in interest rates is the high rate of inflation, which is constantly setting new records.

On Tuesday came official figures showing that inflation in countries using the euro (eurozone) rose to 8.6 percent in June. By comparison, the central bank’s target is 2 percent inflation over time. Inflation in a number of eurozone countries has reached double digits, with the highest rate being in Estonia at 22 percent.

At the previous interest rate meeting, the European Central Bank recognized that inflation is a major challenge in the Eurozone.

High inflation is a big challenge for all of us. The Executive Council will ensure that inflation returns to the 2 percent target over the medium term, the ECB said at the time.

And the central bank will likely continue to stress that it is fighting price hikes, Nordea believes:

– With inflation rising and mounting pressure on prices, the European Central Bank has no room to tone down its rhetoric at Thursday’s meeting, the brokerage house writes.

urgent meeting

After the last interest rate meeting where the European Central Bank, drama erupted when the central bank called an emergency meeting.

After the emergency meeting, the central bank wrote that it would use a new tool to prevent turmoil in the interest rate market, with Italy in particular seeing a sharp increase in government interest rates.

However, Nordea writes in its report that it is unlikely that more details about the tool will likely not convince the market:

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– And even if that happens, the ECB is unlikely to be willing to use the full force of the tool, unless absolutely necessary, the brokerage house wrote.

Big differences

The economic situation is different in different countries in the eurozone. This makes it difficult to set a “one-size-fits-all” interest rate and the ECB has to make compromises with some countries.

Germany is one of the most important cooperation countries in the Eurozone and has good economic development. The German 10-year interest rate is central to the European Union and was around 1.25 percent on Tuesday.

On the other hand, countries like Italy and Greece have very high national debts. Thus, they are highly vulnerable to the expected interest rate hike by the European Central Bank. According to a publication from Eurostat, the total debt of the EU member states reached 93 percent of the GDP of these countries in 2021.

At some point on July 12, 1 euro was trading for exactly $1.0.

Euro weakness

The ECB has more than enough to deal with and a weakening of the euro as a currency is one concern. Last week, the euro and the dollar were worth the same, which has not happened in 20 years.

Normally, the Euro is higher than the Dollar, but recently it has weakened significantly against many currencies.

– The weakness of the euro may cause concern to some members of the central bank, but the European Central Bank may believe that optimistic comments on key interest rates are the best response to the currency outlook at this time, according to a report by Nordea Markets.

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