Europe’s central banks jack up interest rates to fight inflation surge -Breaking
Andy Bruce and John Revill
BERN/LONDON, (Reuters) – Central banks in Europe increased interest rates Thursday. Some of these increases shocked the markets and suggested that borrowing costs could rise to combat the soaring inflation, which is reducing savings and reducing corporate profits.
Inflation was initially fueled by the soaring oil price in response to Russia’s invasion Ukraine. It has since expanded to all food and services, with some regions seeing double-digit inflation.
These levels were not seen anywhere since 1970, when the oil crisis erupted.
Both the Swiss National Bank of Hungary and the National Bank of Hungary caught the markets by surprise with huge upward moves, only hours after their American counterparts at the Federal Reserve increased rates by almost 33%.
In the meantime, the Bank of England lifted borrowing prices by quarter points markets expected.
These moves are just days after the European Central Bank made plans at an emergency meeting to limit borrowing costs in its south, so that it can continue with rate rises in July and September.
According to George Lagarias (Chief Economist, Mazars Wealth Management), “We’re in an era where central banks are aiming at lowering inflation, at all costs of growth and financial stability.”
Switzerland saw the SNB raise its policy rate from -0.75% to -0.25%. This was one of the biggest changes made today.
Some economists believe that the first SNB increase since 2007 will not be the last. However, the bank may be out of negative territory in this year’s fiscal year.
Thomas Jordan, Chairman of the SNB said at a press conference that “the new inflation forecast indicates that further increases may be required in the future.”
On the announcement, the Swiss Franc rose by almost 1.8% to the euro and is on track for its largest daily increase since January 2015, when the SNB freed the Swiss Franc from the euro peg.
London’s Bank of England, however, was cautiouser and said that it would be ready to “forcefully” take action to end the dangers of an inflation rate exceeding 11%.
The BoE raised borrowing costs for the fifth consecutive month, and now the benchmark rate in Great Britain is at its highest level since January 2009.
However, three of the nine rate-setting agents voted in favor of a larger, 50 basis point hike. This suggests that even though economic growth is slowing, there will still be pressure on the bank to raise rates.
Maike Currie of Fidelity International’s Investment Director for Personal Investing stated, “Central bankers walk a fine line, but there is the most concern that they will raise rates too fast, which could lead to recession.”
“Monetary tightening can be a blunt tool for managing a precarious environment.”
Sterling dropped sharply in spite of the Fed’s hike. However, the weaker currency means that there is more inflation from abroad and therefore, further pressure on rates to rise.
The last time the pound saw $1.2085 per dollar was three quarters of an equicent.
The Hungarian central banks unexpectedly increased its deposit rate for one week by 50 basis points, to 7.255%, at a weekly tender. This was in response to the stubbornly increasing inflation, now running in double digits.
Barnabas Virag was the deputy bank governor. He stated that the rate increase cycle would be continued with “predictable, decisive” steps, until the bank sees indications of inflation peaking. This is likely to happen in the fall.
This is also because the country’s currency lost nearly 7% this year. Higher import prices are increasing inflation.