ECB Also Considers Big Step for the First Time in 22 Years

Impact of Inflation and Russian Gas Supply Halt Marks End of Negative Interest Rates After 8 Years
Euro Rebounds Over 1% Temporarily... BOE Governor Also Says "Big Step Is One of the Options"

[Asia Economy Reporter Park Byung-hee] Major foreign media reported on the 19th that the European Central Bank (ECB) is expected to break its previous plan to raise the key interest rate by 0.25 percentage points at the monetary policy meeting on the 21st (local time) and instead decide on a 0.5 percentage point increase (big step).

It is anticipated that the ECB will judge an aggressive key interest rate hike is necessary as inflation shows no signs of easing and the risk of worsening due to Russia's gas supply cut grows. On the same day, Eurostat, the statistical office of the European Union (EU), announced that the Eurozone consumer price inflation rate for June was finalized at a record high of 8.6%.

There is also analysis that the ECB will act to reduce the risk of widening interest rate differentials as other central banks have consecutively decided on large hikes. The U.S. Federal Reserve (Fed) already decided on a big step for the first time in 22 years last May and took a further step last month by deciding on a giant step (a 0.75 percentage point increase in the key interest rate) for the first time in 28 years.

As the interest rate gap between the Fed and ECB widened, the euro recently reached parity with the dollar for the first time in 20 years. Following the outlook for the ECB’s big step, the euro rebounded by more than 1% at one point on the day.

Besides the Fed, the Swiss National Bank unexpectedly decided on a big step last month, and the Bank of Canada surprised the market last week by deciding on an ultra step (a 1 percentage point increase in the key interest rate).

If the ECB decides on a big step, the deposit rate, currently at -0.5%, will be raised to 0%, ending the negative interest rate era that has lasted for eight years since 2014. The ECB’s key interest rate hike will be the first in 11 years since July 2011, and the big step will be the first in 22 years since June 2000.

However, if a big step is decided, there is concern that government bond yields in some heavily indebted Eurozone member countries such as Greece and Italy could rise sharply, increasing debt costs. Italy’s 10-year government bond yield, which is also affected by political instability concerns, rose by 0.05 percentage points to 3.33% on the day.

Christine Lagarde, President of the European Central Bank (ECB)
Photo by Reuters Yonhap News

ECB President Christine Lagarde said at last month’s monetary policy meeting that the key interest rate would be raised by 0.25 percentage points in July and that if inflation remains high, a larger rate hike could be decided at the September meeting. When asked by reporters why a big step was excluded in July, President Lagarde replied that it is better to raise rates gradually and that most central banks do so. However, at the ECB annual forum held in Sintra, Portugal, at the end of last month, she expressed a somewhat changed stance, saying, "There may be situations where gradual increases are not appropriate."

Market participants argue that even if the ECB decides on a big step at this meeting, the timing is late. Fr?d?ric Ducret, an economist at Pictet Asset Management, said, "The ECB should have decided on a big step a long time ago," adding, "The timing of the decision and the way it communicates with the market will be problematic."

The ECB is scheduled to release the results of an economic forecast survey by experts on the 21st, one day after deciding the key interest rate. The long-term inflation expectations are expected to have risen further. Economist Ducret said, "If ECB policymakers already know the survey results, they can use them to persuade those opposed to the big step."

The Bank of England (BOE) is also expected to decide on a big step next month. BOE Governor Andrew Bailey said at the annual banquet held at Mansion House, the official residence of the Lord Mayor of the City of London, "Since the BOE gained independence over monetary policy in 1997, it is facing the most difficult challenge in controlling inflation," adding, "Simply put, a big step will be one of our options at next month’s monetary policy meeting."

UK consumer price inflation already entered the 9% range in April and is currently the highest among the Group of Seven (G7) countries. The consumer price inflation rate for June, to be released on the 20th, is expected to rise by 0.2 percentage points from May to 9.3%. The BOE expects consumer prices to continue rising for the time being, peaking above 11% in October.

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