ECB raises key interest rates - will prices come down?
The European Central Bank (ECB) has raised its key interest rate from 2.25 to 2.5 percent. Officials said the decision was prompted by inflationary pressure caused by the conflict in the Middle East. Prices are being driven up primarily by the oil price shock resulting from the war in Iran. Commentators see little hope of the situation improving with this measure.
No sign of easing in economic uncertainty
There is little hope of interest rates and energy prices coming down for now, The Irish Times fears:
“There is no sign of any easing in the damaging economic uncertainty caused by geopolitical developments. Mortgage borrowers will hope that interest rate increases will be modest – particularly new borrowers or those coming off fixed rates, who are most exposed. The public will hope that the surge in oil and gas prices will reverse, limiting the damage to their pockets. But the risks look set to roll on and, worryingly, energy traders are talking about a 'new normal' of higher oil and gas prices and US president Donald Trump has said the conflict in the Gulf is set to continue until after November's mid-term elections.”
Fight inflation, protect growth
Fund manager Simeon Mavroudis writes in Oikonomikos Tachidromos:
“The ECB must strike a balance between two opposing forces. On the one hand, the rise in energy prices calls for a more restrictive monetary policy. On the other, a prolonged period of high interest rates could place additional strain on the Eurozone's already weak growth. Today's move was expected. The real question for the markets now is whether 2.5 percent is the target rate or simply the next step in a new cycle of interest rate hikes.”
This could backfire
Economist Nerijus Mačiulis warns in IQ:
“There have been times in the past when such interest rate hikes have done more harm than good. For instance, in 2011 after the oil price shock the ECB raised key interest rates twice; the Eurozone economy plunged into recession, and the central bank was forced to cut the rates again that very same year. Although inflation in the Eurozone has increased recently, the situation is very different to that in 2022, when gas and electricity prices rose far more sharply than this year and cereal prices doubled. An even more important difference is that in 2022 the rise in prices was fuelled by strong demand, which is lacking in Europe at present.”