empty
30.08.2022 10:15 AM
The ECB is ready to raise rates based on inflation

This image is no longer relevant

The European Central Bank is poised to repeat the half-point rate hike it implemented last month, said ECB officials who joined the Jackson Hole symposium last week. They also noted that an even bigger move is possible if inflation nears another record.

Executive Board member Isabelle Schnabel, the most senior ECB official present at the meeting, urged other members to "demonstrate their strong determination to quickly return inflation to the target level".

This image is no longer relevant

The Eurozone's consumer price data, which is due out on Wednesday, is likely to highlight the urgency. After all, estimates point to another record high of 9%, which is more than four times the 2% target.

Policymakers are persistently fighting to stabilize prices after inflation spiraled out of control this year. But their ability is limited by the growing risk of recession in Europe, as well as on the fact that they have no control over the war in Ukraine.

Rates aside, other topics covered at the Jackson Hole symposium included the depreciation of euro against dollar and the decrease of bond purchases by the ECB.Interest rates

After a larger-than-expected half-point increase that started in July, a sizeable minority on the 25-member Board of Governors is considering a 75 basis point increase on September. None of the officials indicated they would push for a larger move, citing the importance of data and forecasts that have yet to come. But new forecasts from the ECB are likely to show significant upward changes that could push 2023 inflation to more than 5%, according to people familiar with the situation.

Even some of the ECB's more cautious policymakers, such as Finland's Olli Rehn and France's Francois Villeroy de Galhau, have stressed the need for "significant" action, language thought to signal support for another 50 basis point move.

Meanwhile, Schnabel said that even if a recession hits, they have little choice but to continue the current path. Bundesbank chief Joachim Nagel also said it was too early to think about when to stop raising rates.

Inflation

There is growing concern that people may soon begin to lose confidence in the ECB's ability to control consumer prices.

This image is no longer relevant

The main driver of price pressure is the tension in Ukraine, particularly on its impact on energy prices. It is likely that cuts in natural gas supplies, as well as higher fossil fuel prices, will go on for a long time.

Exchange rate

EUR/USD has lost more than 12% since January, and is stuck below parity. This worsens the inflation outlook, especially since energy prices are mostly calculated in US currency. In terms of trade, euro has depreciated by about 4% this year. In two years, it sank by 20%.

This image is no longer relevant

While ECB officials argue that the exchange rate is not a policy goal and is only one factor in assessing the economy, some are sounding the alarm.

Excess liquidity

Years of bond purchases and generous long-term lending conditions have left more than €4 trillion ($4 trillion) of excess liquidity in the eurozone's financial system. As soon as the deposit rate rises from 0% next month, banks storing this liquidity in the ECB will begin to receive significant risk-free income. However, this will threaten the effectiveness of monetary policy, as well as cause losses to central banks in the region.

Quantitative tightening

With rate hikes continuing, the next logical step is to shrink the ECB's balance sheet. The Fed and the Bank of England have both begun to cut their bond holdings, and a debate is slowly emerging on how to solve the problem in the Euro area. Some more vehemently-minded ECB officials are ready to bring this issue up for discussion - if not in September, then certainly by the end of the year.

Andrey Shevchenko,
Analytical expert of InstaForex
© 2007-2025
Summary
Urgency
Analytic
Andrey Shevchenko
Start trade
Earn on cryptocurrency rate changes with InstaForex
Download MetaTrader 4 and open your first trade
  • Grand Choice
    Contest by
    InstaForex
    InstaForex always strives to help you
    fulfill your biggest dreams.
    JOIN CONTEST

Recommended Stories

Trump Continues Seeking Ways to Pressure China Through Other Countries

According to media reports, President Donald Trump's ongoing efforts to pressure China via its supply chain trading partners threaten to undermine the country's growth and much of its exports

Jakub Novak 10:30 2025-07-22 UTC+2

The European Union Takes on China

While the euro is gradually recovering after a major sell-off observed for most of this month, recent data shows that the latest round of EU sanctions has targeted a number

Jakub Novak 10:24 2025-07-22 UTC+2

The Closer We Get to August 1, the More Tense Market Conditions Become (Potential Decline in #USDX and USD/JPY Pair)

As August 1 approaches—the date previously announced by Donald Trump for the imposition of tariffs against U.S. trading partners—market participants are becoming increasingly focused on this issue, exercising caution

Pati Gani 10:14 2025-07-22 UTC+2

Market braces for 'Zombie Liberation Day'

Despite the looming August 1 deadline, when the White House's sweeping import tariffs are set to take effect, the S&P 500 keeps hitting new record highs. Step by step

Marek Petkovich 09:10 2025-07-22 UTC+2

What to Pay Attention to on July 22? A Breakdown of Fundamental Events for Beginners

There are no macroeconomic reports scheduled for Tuesday. Therefore, weak market movements can be expected throughout the day. Of course, Donald Trump may at any moment retake center stage with

Paolo Greco 07:20 2025-07-22 UTC+2

GBP/USD Overview – July 22: American-Style Business in All Its Glory

The GBP/USD currency pair also traded higher on Monday, despite the absence of any local drivers. Let us recall that no fundamental or macroeconomic event was scheduled on the first

Paolo Greco 03:45 2025-07-22 UTC+2

EUR/USD Overview – July 22: The Dollar Has No Prospects

The EUR/USD currency pair traded higher throughout Monday. The rise in quotes began early in the morning and persisted for most of the day. Despite the lack of fundamental

Paolo Greco 03:45 2025-07-22 UTC+2

Trump Raises the Stakes in the Fight with the EU

The new week had barely begun when the dollar faced fresh reasons for decline. Over the past two weeks, there have been plenty of such reasons, but the market persisted

Chin Zhao 00:43 2025-07-22 UTC+2

EUR/USD: Bloomberg Leaks and Lutnick's Statements. Trade Talks in Focus

Last week, the euro-dollar pair traded within the range of 1.1560–1.1650, repeatedly testing the boundaries of this corridor. On Friday, traders attempted to consolidate above the 1.1650 resistance level

Irina Manzenko 00:42 2025-07-22 UTC+2

The Dollar Raises the Stakes

Appetite comes with eating. Initially, Donald Trump wanted to impose a 10% universal tariff on Europe; now he has raised the stakes to 15%. Starting August 1, it will rise

Marek Petkovich 00:42 2025-07-22 UTC+2
Can't speak right now?
Ask your question in the chat.
Widget callback
 

Dear visitor,

Your IP address shows that you are currently located in the USA. If you are a resident of the United States, you are prohibited from using the services of InstaFintech Group including online trading, online transfers, deposit/withdrawal of funds, etc.

If you think you are seeing this message by mistake and your location is not the US, kindly proceed to the website. Otherwise, you must leave the website in order to comply with government restrictions.

Why does your IP address show your location as the USA?

  • - you are using a VPN provided by a hosting company based in the United States;
  • - your IP does not have proper WHOIS records;
  • - an error occurred in the WHOIS geolocation database.

Please confirm whether you are a US resident or not by clicking the relevant button below. If you choose the wrong option, being a US resident, you will not be able to open an account with InstaForex anyway.

We are sorry for any inconvenience caused by this message.