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The ECB will raise interest rates by at least half a percentage point

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The European Central Bank (ECB) is expected to raise its interest rates this Thursday by at least half a percentage point to curb the escalation of inflation, which in August reached 9.1% in the euro area.

Given the strong increase in prices, the probability that the Governing Council of the ECB decides on a rise of three quarters of a point increases, which would be the largest increase in its history.

The ECB has only made a move of this magnitude once, on December 10, 2008, but in the other direction, downwards, in the midst of a financial crisis after the bankruptcy of Lehman Brothers.

The ECB began raising its interest rates last July, for the first time in eleven years, by half a percentage point.

With ECB interest rates now at 0.50% and the deposit facility at 0%, the euro area exited negative interest rates in July.

The ECB is now more concerned about the risk of persistently entrenching inflation and less about the recession and wants to curb demand as supply constraints with high demand push prices up.

Energy and food prices could remain high for a long time and then wage increases would be very high.

Companies face higher costs due to higher energy, raw materials, transport and logistics costs, which have already begun to be transferred to their products and services.

Bottlenecks in the supply of industrial goods also drive up prices.

In addition, the depreciation of the euro exchange rate intensifies the rise in the prices of energy and other raw materials.

Unions are now demanding strong wage increases in several of the countries that share the euro, including Germany, the region’s strongest economy.

In addition, the threat of recession increases if Russia interrupts the energy supply and companies must stop their production and households reduce consumption because otherwise the energy cost would be very high.

The ECB will also publish its new quarterly macroeconomic projections on Thursday, in which it will probably revise growth down and inflation up.

In June, the ECB forecast inflation of 6.8% and growth of 2.8% in 2022.

Inflation will be 3.5% and growth 2.1% in 2023 and both 2.1% in 2024, according to June calculations.


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