ECB's First Interest Rate Hike in 11 Years, Signals 'Big Step' in September [Era of Ultra-Tightening]

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Hyunwoo Lee] The European Central Bank (ECB), which had maintained a cautious stance until now, announced an interest rate hike for the first time in 11 years, joining the tightening trend of central banks worldwide, including the United States. The ECB indicated a 0.25 percentage point increase starting in July, followed by the possibility of a so-called ‘big step’ with a larger hike in September. Amid the successive high-intensity tightening moves by central banks, stock markets in Europe, the United States, and Asia?including Korea and Japan?are all showing a downward trend.

On the 9th (local time), the ECB held a monetary policy meeting and announced that it would raise the benchmark interest rate, currently at 0%, by 0.25 percentage points starting in July and would raise it again in September. This is the first time in 11 years that the ECB has announced an interest rate hike. The ECB had previously lowered the benchmark interest rate to 0% in March 2016 and maintained zero interest rates for more than six years.

In particular, the ECB shocked the market by mentioning the possibility that the September hike could be larger than that in July. The ECB stated, "We plan to raise the benchmark interest rate again in September," adding, "If the medium-term inflation outlook remains unchanged or worsens, a larger increase would be appropriate." It also announced that quantitative easing policies would be halted starting in July. Bond purchases under the current Asset Purchase Programme (APP) will end on July 1.

The market is focusing on the U.S. Consumer Price Index (CPI) for May, a key indicator that can gauge the intensity of tightening, ahead of the Federal Open Market Committee (FOMC) meeting scheduled for the 10th. Economists at The Wall Street Journal (WSJ) estimate that the May CPI will remain unchanged at 8.3% compared to the previous month.

However, concerns persist in the market that inflation has not yet peaked. Mohamed El-Erian, Chief Advisor at Allianz, pointed out, "Considering the recent rise in oil prices, the view that the peak was passed in May needs to be revised," adding, "Housing costs and food prices are also continuing to rise."

Concerns about a global economic recession are deepening due to soaring inflation, the full-scale tightening by major countries, and supply chain worries caused by the prolonged Ukraine war.

This content was produced with the assistance of AI translation services.