As investors digest the latest news that, at it’s meeting today, the ECB has increased interest rates for the first time in 11 years to zero percent, the ECB decision has also attracted attention for it’s new ‘anti fragmentation’ tool aimed at limiting divergence in borrowing costs between the EU’s strongest and weakest countries.
Hinesh Patel, portfolio manager at Quilter Investors believes that it could be too little too late commenting:
“The European Central Bank has at long last joined the rate hike club with this afternoon’s 50 basis point increase – the first ECB interest rate rise for 11 years. The move was bigger than the 25 basis points hike the ECB had previously planned, though this comes as no surprise given runaway inflation. A larger rate rise was already penned in for September should the need arise and this is now all but confirmed.
“However, the ECB is pushing on a string with rate hikes that will do little to quell what is predominantly an energy crisis. The ECB has waited far too long relative to the Fed and the Bank of England, thereby creating additional pressure on the EUR which is adding to inflationary pressure. The stall in industrial activity indicates that this rate hike is likely to have minimal impact. Headline inflation is now creeping into core which will be gravely concerning to the ECB, especially as costs now represent the most pressing problem for corporates in the region – particularly for the likes of Italy.
“Inflation is a major issue and will be for some time yet and the balancing act faced by the ECB remains a difficult one. The bloc is faced with inflationary shock combined with ongoing uncertainty driven by the war in Ukraine, but the ECB’s previous inaction means today’s rate hike could well be too little too late.”
Garry White, Chief Investment Commentator at Charles Stanley, comments:
“The European Central Bank (ECB) has delivered on its promise from early June and raised interest rates by 0.5%.
“This is in line with its promise to be “tougher on inflation”, but the ECB has possibly the most difficult balancing act of all the major central banks. Eurozone inflation hit 8.6% in June, and the economy of some of the states in the union remains fragile. There is a danger that the rates of interest on longer term bonds will rise dramatically in places like Italy and Greece. If the cost of borrowing rises too far too fast, it will be easy for numerous countries to fall into stagflation or recession.
“The ECB hawks are sounding tough right now, but they may have to temper their talk and guidance to face up to the realities of weak government finances in the periphery – and the fact a slowdown is already underway. Adding to the complexity is Vladmir Putin’s threat to reduce gas supplies to Europe in response to sanction over its invasion of Ukraine. This would result in another leg up for energy prices in Europe, and is an issue over which the ECB has no control.
“And to top it off, the ECB will now also be worried about political problems in Italy for the Draghi coalition. For voting members of the ECB, inflation is not their only preoccupation, unlike the other western central banks.”