’Bout Time

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What's going on?

The European Central Bank (ECB) announced on Thursday that it’ll finally be hiking interest rates next month.

What does this mean?

Inflation in the Eurozone hit another record high for the third month in a row in May, with prices 8.1% higher than the same time last year. That’s a long way off the ECB’s official target of 2%, and it’s forced the central bank to cave into long-rejected measures. First, it confirmed it’s on track to halt its bond-buying program in July. Then it said that it’ll be raising interest rates by 0.25% next month, despite having previously said it wouldn’t do anything of the kind this year. It even left the door open for a bigger hike in September, which shows how serious it is about the problem at hand: it’s been more than a decade since it last hiked rates, and marks a turnaround from an eight-year policy of negative rates and mass bond-buying (tweet this).

Why should I care?

Zooming in: The ECB fiddled while Rome burned.
This rate hike will still leave the ECB way behind the 60-odd other central banks that have already raised rates this year, which is understandable: it’s been trying to rein in inflation amid a backdrop of war that’s hit Europe particularly badly. Trouble is, this hesitancy seems to have made matters worse: the ECB is now expecting inflation to be 6.8% this year, and economic growth to be 2.8% – compared to its previous forecasts of 5.1% and 3.7%.

The bigger picture: Make sure Rome doesn’t burn to the ground…
Economists at BlackRock think rates will rise more slowly than investors are expecting once they break into positive territory. After all, the ECB can’t risk doing more than it absolutely has to: consumer confidence in the eurozone is already near all-time lows, while the eurozone’s most indebted members – we’re looking at you, Italy – are much more sensitive to increases in borrowing rates.

Originally posted as part of the Finimize daily email.

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