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In order for nations to combat the escalating energy crisis, the European Central Bank declared that it would jack up interest rates as much as possible. The ECB raised interest rates by three-quarters of one percent on Thursday and stated that an increase would likely occur in the upcoming days.
Following the rift with Russia, which resulted in the supply cutbacks of gas entering the European nations through significant pipes, particularly the Nord Stream 1, Europe has been rushing to keep up with the rising energy demand. Unfortunately, the extreme heat now gripping the nation only worsens the issue.
Years after, the ECB raised the rate to zero in 2011; it is currently over that proportion. The Central Bank benchmarked interest rates over zero percent and above the negative area for the first time as a result of this action. The ECB stated in a statement that they anticipate more hikes to take place.
“The Governing Council took today’s decision and expects to raise interest rates further because inflation remains far too high and is likely to stay above target for an extended period,” the ECB added.
Inflation in the UK is currently 9.1% due to the soaring costs of goods like food and energy.
The effects of the Russian war on the energy crisis
Europe attempted to break its reliance on Russian fuel exports when Russia started a war with Ukraine. The G7 nations have recently voiced their disagreement with Russia’s ongoing aggressiveness towards its neighbor.
Russia turned off the natural gas that supplies numerous European nations, including Germany, as a reprisal. As a result, the government was under pressure to boost its subsidy for businesses and people in order to offset the rapid consequences of the supply reduction. The supply cuts caused a significant spike in energy costs.
These variables raise the possibility of a European recession, according to analysts. Germany’s economy is not functioning as efficiently as anticipated, firms are reporting poor sales and activity, and inflation is at a level not seen in decades. The region’s gross domestic product may also decline in the upcoming quarter.
The ECB has also determined that many already anticipate rising inflation rates due to the present fiscal climate. The ECB is concerned about not hitting its goal for the year because the resulting spending and investing behaviors of corporate leaders and individuals may change.
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“Price pressures have continued to strengthen and broaden across the economy, and inflation may rise further in the near term,” stated the ECB.
Inflation rates in the region might rise to an average of 8.1% in 2022, according to the ECB’s current projections. Additionally, the central bank anticipates a steep decline in the rate to 5.5% in 2023. But from 3.1% this year to just 0.9% the following year, economic growth is predicted to slow.
“There seems universal agreement that higher rates are required to prevent higher inflation becoming embedded, though [Russian] President Putin is creating a lot of slack in the European economy already,” stated Societe Generale strategist Kit Juckes.
According to ECB president Christine Legarde, a negative scenario might occur in which the European Union enters a recession. Rationing, supply restrictions, and climatic issues are to blame for this.
Holger Schmieding, Berenber’s chief economist, said: “It still seems likely that, once the ECB realizes the depth of the recession that we expect to unfold, the ECB will put rate hikes on hold at some time in early 2023.”
Opinions expressed by Texas Today contributors are their own.
