Think the US Fed has a tough job? The ECB’s Lagarde has it worse
The European Central Bank is one of the last major central banks holding off on interest rate increases—until this week. …
The European Central Bank is one of the last major central bank holding off on interest rate increases—until this week.
On Thursday, the ECB is widely expected to raise rates, marking its first hike in 11 years. Though president Christine Lagarde has previously told markets to expect a 0.25 percentage-point increase, a recent Reuters story suggests the central bank is considering a 0.50 percentage-point jump.
That would still put the ECB far behind the US Federal Reserve, which has upped rates by 1.5 percentage points since the beginning of the year and could raise them by another 0.75 percentage point later in July. But Lagarde and her colleagues have good reasons to move more slowly. Europe’s economy is in a fragile state as it absorbs the shocks from Russia’s invasion of Ukraine. It was already in the midst of an energy crisis before the recent crippling heat wave put a further crimp on supplies.
There’s also growing concern that Russian president Vladimir Putin will stop sending natural gas to Europe altogether. The International Monetary Fund has warned this would send several EU states into recessions, with Hungary, Slovakia, and the Czech Republic being hit the hardest. Meanwhile, drought risks are contributing to already high food prices.
Inflation in the EU vs. the US
EU inflation topped 2% in mid-2021 as it did in the US, but trailed behind US levels until recently. Consumer prices jumped by 8.6% in June from last year.
The ECB is now also dealing with the euro’s falling value against the US dollar. Because the dollar is the preferred currency for global trade, this will increase European import prices for goods at the same time that gas prices are spiking, Greg Fuzesi, a euro area economist for JPMorgan Chase, pointed out in a research note.
The ECB also has farther to go than the Fed to make borrowing more expensive because its target rate is lower than what the Fed’s was when it started tightening. Given the European economy’s mounting challenges, the central bank may have to pick up the pace of its hikes in coming months.
