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Shortly after the European Central Bank announced its first increase in interest rates in 11 years by half a percentage point, its president, Christine La Garde, appeared before reporters to give some explanations.
La Garde acknowledged that the war in Ukraine and skyrocketing inflation have clouded the eurozone’s economic outlook.
“We expect inflation, albeit against our will, to continue to remain high for some time, due to continued pressure from energy and food quoting and the pressure that gas pipelines have on the price chain. Russia’s unjustified aggression against Ukraine is influencing economic growth. The impact of high inflation on purchasing power, continued supply constraints and higher uncertainty are having a dampening effect on the economy.” said Christine La Garde, president of the ECB.
The ECB said in a press release after its governing council meeting in Frankfurt that it “judged that it was appropriate to take a larger first step towards policy rate normalization than it signaled at the previous meeting” because of higher-than-expected inflation and support for the new bond-buying scheme.
The ECB may be under pressure, also because the interest rate differential with the US is widening. After inflation there reached 9.1 percent in June, the US Federal Reserve is likely to raise interest rates by 75 basis points from the current 1.5 percent to 1.75 percent.
This continues to put pressure on the euro, which a few days ago had fallen to the level of the US dollar.
And finally, the financial markets are also watching from Italy. The government crisis there does not ease the situation for the ECB.
New elections there could lead to “significant turbulence” in eurozone government bond markets if the new government is led by Eurocritics, suspects Edgar Walk, chief economist at Bankhaus Metzler.
The ECB has announced a so-called anti-fragmentation instrument. Through this, it wants to preemptively mitigate possible turbulence in the European government bond markets.
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