European Central Bank (ECB) Interest Rate Hike
On September 8th, the European Central Bank announced the implementation of the largest interest rate hike in history, raising all three key interest rates in the Eurozone by 75 basis point. After the rate hike, the main refinancing rate, marginal lending rate and deposit rate will be raised to 1.25%, 1.50% and 0.75% respectively since the 14th of this month. Previously, the European Central Bank raised each of these three key interest rates by 50 basis point on July 21. In the face of inflationary pressure and uncertainty, the European Central Bank said it will further raise interest rate in the future to lower demand and prevent the risk of inflation expectations continuing to rise. This article will analyze the main reasons for the recent ECB rate hike and its main impact on European economy. There are at least two reasons for the ECB to raise interest rate. The first reason is the sharp drop in Russian gas exports to the EU as a result of the Russia-Ukraine conflict. Russia has cut its natural gas supply to the EU several times this year, and in response to sanctions imposed by many European countries, the “Nord Stream 1” project has been shut down many times. In fact, about half of Europe’s natural gas supply comes from Russia. In 2021, the EU will import 155 billion cubic meters of pipeline gas from Russia, accounting for about 45% of the total gas imports of the EU.
Therefore, the supply shortage caused by Russia’s gradual reduction and interruption of natural gas supply to EU countries has become the main reason for the skyrocketing natural gas prices. Winter is about to come in October, and natural gas consumption is gradually increasing, which may bring prices to continue to rise. The second reason is a potential food crisis. In the summer of 2022, Europe suffered its worst drought ever in the past 500 years, which severely affected food production. According to some reports, Europe’s corn production in 2022 will be 16% lower than the average of the previous five years, and soybean and sunflower oil production will be 15% and 12% lower, respectively. In addition, in May this year, after Russia blocked Ukraine’s Black Sea exit, both Russia and Ukraine’s grain exports were affected, causing fluctuations in the grain market.
The ECB rate hike will have some significant influence on the European economy. First, in a long-term loose monetary environment, controlling inflation will bring greater employment pressure. In the long-term loose monetary environment, the economy’s reduced interest rate sensitivity and the current round of globalized inflation has made it necessary to tighten monetary policy more strongly to control inflation. Second, European stocks and the euro against the dollar will face downward pressure. From the perspective of inflation, the median forecast of economists estimated by Bloomberg shows that the U.S. consumer price index (CPI) rose by 8.3% year-on-year in August and fell by 0.1% month-on-month, while Eurostat reported that the euro zone CPI was 9.1%, a new record. In addition, the European Central Bank’s interest rate hike will likely increase the pressure on European countries’ sovereign debt and exacerbate the trend of insufficient demand.
By Tao Cheng
