• February 1, 2023

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Topline

The European Central Bank on Thursday authorized its first interest rate hike in 11 years in a bid to help cool rising inflation, becoming the latest central bank to more aggressively unwind policy that fueled economic growth during the pandemic even as global recession fears continue to rise.

Key Facts

In a statement on Thursday, the ECB said it would raise rates by 50 basis points as a “key step to make sure inflation returns to its 2% target over the medium target”—coming in at the higher end of expectations calling for an increase of at least 25 basis points.

Officials also signaled additional hikes to come, saying “further normalization” of interest rates will be appropriate, though they suggested the larger hike on Thursday will allow them to move more slowly with future increases, adding: “The frontloading today… allows the Governing Council to make a transition to a meeting-by-meeting approach to interest rate decisions.”

The decision comes after data showing inflation in the United Kingdom skyrocketed 9.4% in June, hitting a new 40-year high and surpassing similarly high inflation of 9.1% in the United States.

In a speech late last month, ECB President Christine Lagarde warned there are “growing signs”—including the ongoing war in Ukraine—that suggest “supply shocks hitting the economy could linger for longer” and further warned unforeseen shocks could de-anchor inflation expectations.

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Lagarde doubled down on the message Thursday, telling reporters at a press conference that inflation could remain “undesirably high for some time” while also tempering concerns by saying she still doesn’t believe a recession in Europe is the most likely scenario over the next year.

Tangent

Though it was initially flat for the day, the United Kingdom benchmark FTSE 100 fell 0.9% to 7,200 points after the announcement. Global stocks didn’t fare much better: S&P 500 futures erased pre-market gains to trade roughly flat by 9:15 ET.

Key Background

Rising food and energy prices—fueled in part by Russia’s invasion of Ukraine—have elevated inflation around the world, pushing many central banks to raise interest rates, which help lower prices by making borrowing more expensive and thereby curbing demand. Increasingly, however, experts worry aggressive central bank policy to curb ongoing price spikes will usher in low economic growth this year and potentially risk a global recession. “Excessive rate hikes could push the consumer-led economy into not only a short-term, but a longer-term recession,” says Nigel Green, the CEO of $12 billion advisory deVere Group, warning of the risk central banks “hit the brakes too hard” in the coming months.

Further Reading

Inflation Goes Global: It’s Not Just Rising In The U.S.—But Europe, South Korea And More (Forbes)

Inflation May Get Much Worse This Summer—And Could Linger ‘Many Years’—Experts Warn (Forbes)

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