Interest rates

EU faces major pressure on interest rates – bloc ‘left behind’ as US takes key decision | City & Business | Finance

Tonight the US central bank, the Federal Reserve, will announce its decision whether or not to raise interest rates with heightened expectations of a hike since interest rates were cut in 2020. If the Fed indeed goes into this direction, it will put additional pressure on the ECB to follow suit, as the bank has so far resisted calls to change interest rates. Matthew Ryan, senior market analyst at Ebury, said: “The ECB risks being completely left behind by its key peers, most of whom appear set to embark on an aggressive tightening cycle this year. We believe that higher rates elsewhere, rising inflationary pressures and growing signs of dissent among Governing Council members will make it very difficult for the doves of the ECB to keep going for too long.”

ECB President Christine Lagarde has frequently suggested there won’t be a hike until at least 2023, among doves in favor of lower interest rates.

Recently, Ms Lagarde insisted the ECB had ‘every reason not to act as quickly or as ruthlessly’ as the US, telling France Inter radio that she wanted to avoid ‘stifling growth’ .

Ms Lagarde and the ECB have frequently tried to argue that the eurozone is in a different situation than other economies, but Mr Ryan suggested that “the recent spike in inflation in the (eurozone) suggests otherwise. “.

Inflation recently hit five percent for the Eurozone in December, with the European Union as a whole seeing it rise to 5.3 percent.

With Europe heavily dependent on Russia for its natural gas supplies, the International Monetary Fund warned this week that the escalation of the conflict is likely to push energy and commodity prices even higher, maintaining a higher inflation for longer.

However, Christopher Dembik, head of macroeconomic analysis at Saxo Bank, predicted that the ECB “would try to stay in a wait-and-see position for as long as possible, regardless of the pace of monetary policy in the United States.”

He explained: “We should not compare monetary policy in the eurozone and the United States.

“The calculation of inflation is different, the level of inflation is different and there are little or no financial risks in the euro zone at the moment.

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Inflation has become a widespread problem in major economies, with UK levels hitting their highest level in almost 30 years at 5.4%.

As the Federal Reserve considers its next move today, US inflation sits at a staggering 7%, meaning it will likely be a major consideration.

The starting gun to raise interest rates was launched by the Bank of England in December with an increase to 0.25%.

With inflation continuing to rise in the UK, expectations have risen for another rate hike to come next week, with markets pricing up to four in total in 2022.