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ECB to Increase Rate if Inflation Stays Hot, but More Coming

The European Central Bank (ECB) is predicted to hike its key interest rate by 25 basis points. Some experts say this rate increase will occur in the next two meetings, and some say this will only happen after a while. But this all depends on the economic outlook.

Several ECB policymakers have reiterated that the central bank, if necessary, raises the interest rate for longer than prediction. This policy needs to be implemented for underlying inflation, which shows a significant sign of cooling, and the economic outlook is also brighter.

Before the May meeting, the ECB carried out a crucial policy by raising interest rates by 75 or 50 basis point moves, which happened for a series of reasons. While the ECB started its hiking cycle later than other major central banks, this remains one of the most vital.

"The messaging from several ECB speakers has shown signs of a hawkish side since the meeting on 4 May. Their customer expectations survey showed higher inflation expectations," said Ruben Segura Cayuela, European economist at Bank of America.


Europe's Economic Outlook Looks Brightens, Stocks Rise but Inflation Still Squeezes

Inflation continues to run well over three times the target, of which the ECB is targeting a target of 2% in terms of inflation. A recession also looks distant, with around 40% probability within two years. So this frees the ECB to take rates higher and observe the resulting impact.

For now, the ECB total has raised rates by 375 basis points, at least from July, intending to curb inflation. It is predicted that the resulting impact will be gradual, and it will take until 2025, so the Central Bank can see inflation in the bank's target zone of 2%.

"Most of the impact on inflation is expected to be seen in 2023 slowly, and the impact peaking in 2024. The tightening of policy is estimated to have lowered inflation by around 50 basis points in 2022," said an ECB statement.

It also adds that: "the downward impact on inflation is expected to average around two percentage points over the period 2023 – 2025. The transmission to economic activity is faster, with GDP growth impacting to peak in 2023 and a low impact of 2% over the period."

However, the more important news is the EU's executive body, which raised its economic growth forecast. Europe had dodged a winter recession, but the warning that stubbornly high inflation made economic movements chaotic and more worrying for people.

Europe Commissioner for Economy, Paolo Gentiloni, told the news conference: "The European economy continues to show resilience in a challenging global context. Declining energy prices, diversification of energy supply, and reduced consumption resulted in an economic impact."

Officials cautioned that if inflation is persistently high and erodes people's purchasing power, then this will make the ECB revise its policy. Challenges in the interest rate sector made the ECB more strategic, and consumers began to switch to European stocks again.

Economists Predict that an Increase in Interest Rates Will Not Occur Soon and Will Only Happen Once or Twice

Meanwhile, the European Central Bank is expected to keep interest rates at their highest levels longer than expected. This also highlights the ECB's desire to control prices so that an increase in interest rates shortly is predicted to be unreasonable.

Apart from that, economists also say that the ECB is no longer hurrying to raise interest rates. After a 375 basis point hike since July, the European Central Bank will likely only raise interest rates another 1 or 2 times, which is in a tightening cycle.

The European economy is looking better lately even though inflation is still well above target. But the European Central Bank is more strategic in preparing policies not to affect consumer power. An increase in interest rates is also predicted later.




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