European Central Bank raises rates in response to inflation fuelled by high oil prices from the Iran war
The central bank for 21 member countries cited its decision as a response to inflation fuelled by high oil prices from the Iran war.
The European Central Bank raised interest rates Thursday to cool inflation that is being fed by high oil prices from the Iran war. The decision was supported by a stronger-than-expected economy that suggests businesses can weather the higher borrowing costs.
The central bank for the 21 EU member countries that use the euro currency raised its benchmark rate by a quarter percentage point to 2.50 per cent at a meeting held in Berlin, away from the bank’s Frankfurt headquarters.
The bank said in an accompanying statement that “the conflict in the Middle East continues to generate inflation pressures, and inflation is set to remain well above target for an extended period.”
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The bank last raised rates at its June 11 meeting, then hit pause at its July 23 session. Remarks by ECB President Christine Lagarde later Thursday will be parsed by market analysts and investors for clues about whether more interest rate increases are coming.
Inflation concerns are also weighing on the US Federal Reserve, whose rate-setters next meet September 15-16. Fed Chair Kevin Warsh has said the bank may have “more work to do” to contain US inflation of 3.7 per cent.
Meanwhile in Australia, home loan borrowers have been warned by the Big Four banks to expect another rate rise either later this month or on Melbourne Cup day, likely taking the cash rate to a 15-year high of 4.6 per cent.
High energy prices are one reason eurozone inflation came in at 3.3 per cent in August, above the bank’s target of 2 per cent. Oil prices have risen above $US100 per barrel due to lower tanker traffic through the Strait of Hormuz that are under threat of Iranian attack. Decisions being made about borrowing costs are complicated by the fact that it’s impossible to say how long the shipping restrictions and high oil prices will last.
Higher rates cool inflation by making it more expensive to borrow and buy things, from houses to new factories. That reduces demand for goods and eases pressure on prices. The ECB benchmarks affect banks first, and through them lending rates throughout the economy.
The ECB’s move was “a hike to stay ahead of the curve, demonstrating the ECB’s high level of vigilance, and an attempt to prevent higher energy prices from feeding through to the broader economy,” Carsten Brzeski, global head of macro at ING bank, wrote in an email.
