Inflation. Major rate hike by the ECB next Thursday!

BCE euro devant siège

Here is what AFP tells us.

ECB determined to hit hard against inflation

“After a first rate hike that was larger than expected in July, the European Central Bank (ECB) is once again caught up in inflation records and could accelerate the tightening of its monetary policy on Thursday.

“The only question is whether an increase of 50 or 75 basis points” in reference rates will be decided after the Board of Governors, judge Carsten Brzeski, economist at ING.

The second option is the hypothesis favored by observers as prices rose by 9.1% over one year in the euro zone in August, a record since the creation of the single currency and a score very well above the rate of 2% targeted by the ECB in the long term.

The euro sank below the $0.99 threshold on Monday for the first time in 20 years, with the recession looming in the eurozone playing in favor of the greenback.

If the ECB will not raise its rates “with the explicit aim of strengthening the European currency”, its weakness “could have an impact on the decision-making” of the monetary institute, notes Frederik Ducrozet, chief economist at Pictet Wealth Management . »

The situation is complex.

Let us resume calmly and factually.

Most of the current inflation is linked to the energy crisis and the price of gas from Russia… since nothing is coming from Russia. Here is the problem. Rate hikes will do nothing to fill the pipelines. To reduce inflation linked to the absence of gas, you need gas! Simple. Everything else is literature.

But this is not the only element.

The euro is weak because the rates in the United States are much higher. As a result, the euro has fallen and lost almost 20% over the past year. When your currency drops by 20%, everything you import and pay in dollars costs 20% more. So the fall in the euro adds inflation.

On this part, the rise in ECB rates will strengthen the value of the euro against the dollar and limit inflation linked to the exchange rate differential.

But by increasing rates significantly in a euro zone plagued by deficits and monstrous public debts, the central bank risks creating a major recession leading to the insolvency of economic players.

Moreover, the AFP is not mistaken and even dares to write that:

“However, rate hikes to follow in October and December could “exacerbate tensions on the bond market” and make borrowing conditions more expensive for countries in the euro zone deemed to be more vulnerable, such as Italy, warns Holger Schmieding, economist at Berenberg. The ECB could then inaugurate its new tool, presented this summer, intended to enable it to intervene in the markets in order to counter speculative attacks on debt..

We are entering a period of very high volatility and great concern.

However, do not be afraid, prepare yourself, be resilient, diversify your assets and your heritage, overweight cash because crises are also periods of opportunity… and subscribe to the STRATEGIES letter to be able to anticipate and react. before everyone else, as has been the case for more than two years now. (All information here to subscribe).

Charles SANNAT

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Source AFP via here

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