Today, the European Central Bank (ECB) announced a 0.75% rise in interest rates in an effort to contain the spiralling headline annual inflation rate.
The increase had been planned since September after the consumer prices index (CPI) rose to 9.1% last month. It brings the Eurozone in line with the more hawkish monetary policies enacted by the Bank of England and the Federal Reserve.
This hike is the second after a long record of zero or negative interest rates, which was broken in July with the first increase in 11 years.
According to Neil Birrell, chief investment officer at Premier Miton Investors, the manoeuvre does not paint a pretty picture of the future economy.
“The ECB has gone for it; a 0.75% increase in rates and a promise of more to come,” he said. “The ramification of this is clear, in that there must be a threat to growth, which they have recognised by slashing their 2023 GDP growth forecast to 0.9%.
“Central banks have been talking tough for a while and actions are backing that up. The fear of the damage that can be done by inflation is by far outweighing the risks posed by recession.”
Hinesh Patel, portfolio manager at Quilter Investors, meanwhile, had concerns about the sustainability of the decision and its effectiveness in tackling the energy crisis.
“The ECB governing council’s decision to further increase rates is a sideshow to the increasing risks of sovereign debt sustainability,” he said.
“More important is the disappointing lack of news on measures to be deployed to reduce the risk of another sovereign debt crisis.”
While it will be a “welcome boost” for banks and savers who have been financially repressed, he noted it will do little to solve the energy crisis exacerbated by Russia’s ongoing aggression on Ukraine.
“Ultimately, Lagarde’s council may be repeating the same mistake as Trichet’s in 2011 by hiking in to rising commodity prices that are outside of monetary policy control,” he said.
However, Jan Felix Gloeckner, senior investment specialist at Insight Investment, said the move was necessary to contain inflation expectations.
“Although higher rates are going to be painful in the short term and will add to the squeeze being inflicted by higher energy prices, anchoring longer-term inflation expectations is critical to prevent a further upward spiral.
“Today’s decision should hammer home the central bank’s commitment to bringing inflation back down towards target in the years ahead.”