ECB hike by 0.75 until the neutral zone

ECB hike by 0.75 until the neutral zone

Noriko Watanabe and Kanako Mita

Modern Tokyo Times

Last week, members of the European Central Bank (ECB) announced that the base rate would be hiked. The only dispute was by how much – 0.50 or 0.75 percent? Therefore, the announcement of a 0.75 base rate hike wasn’t surprising – given the severity of inflation and other economic factors. 

The Central Bank chief of France, Francois Villeroy de Galhau, said the ECB should focus on the “neutral rate.” Hence, the base rate should be between 1% to 2%. Thus, a fair balance where economic growth doesn’t stimulate falsely and economic growth isn’t held back.

Reuters reports, “The European Central Bank raised its key interest rates by an unprecedented 75 basis points on Thursday and promised further hikes, prioritizing the fight against inflation even as the bloc is likely heading towards a winter recession and gas rationing.”

Villeroy said, “Have no doubt that we at the ECB would if needed raise rates further beyond normalization: bringing inflation back to 2% is our responsibility; our will and our capacity to deliver on our mandate are unconditional.” 

Central Banks from Austria and the Netherlands raised the issue of a possible hike of 0.75. Hence, France and Germany – and other members – adopted an open stance to the proposals by Austria and the Netherlands.

Christine Lagarde, the head of the ECB, said, “We expect to raise interest rates further because inflation remains far too high and is likely to stay above our target for an extended period.”

Legarde continued, “Where we are is not the neutral rate… We are heading in that direction. It takes frontloading. It will take further hikes in the next several meetings.”

The Guardian reports, “The move follows a similar increase by the US Federal Reserve and is expected to put pressure on the Bank of England to follow suit when its policymakers meet next week to review the UK’s monetary policy.”

The ECB says, “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. According to Eurostat’s flash estimate, inflation reached 9.1% in August. Soaring energy and food prices, demand pressures in some sectors owing to the reopening of the economy, and supply bottlenecks are still driving up inflation…”

Haruhiko Kuroda, head of the Bank of Japan, said, “Somewhat miraculously, now we have 2.4% inflation. But almost wholly caused by the international commodity price hike, energy, and food.” 

Kuroda continued, “… we have no choice other than continued monetary easing until wages and prices rise in a stable and sustainable manner.”

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