ECB Raises Interest Rates by 0.25% Amid Inflation Concerns

• The U.S Fed yesterday announced an interest rate hike of 25bps.
• The more stringent monetary policy is having an immediate effect, notably on bank lending.

Investors are wondering whether today’s announcement of a 0.25% hike in the European Central Bank’s benchmark interest rate is the final one of the year despite persistently high inflation. Since last summer, the ECB has tightened policy by 400 basis points, the most rapid pace in the bank’s history.

With loan demand at an all-time low and economic indicators pointing to a slowing primary interest rate, many predicted the European Central Bank (ECB) would increase its primary interest rate (the deposit rate) to 3.75%.

Hampering Economic Growth

Rapidly rising interest rates might hamper lending in the Eurozone and, by extension, economic growth. Eurozone economies are mostly bank-financed since their capital markets are less established and liquid than those in the United States. The more stringent monetary policy is having an immediate effect, notably on bank lending, according to Philip Lane, chief economist at the European Central Bank.

People in the region are increasingly looking to Bitcoin and other cryptocurrencies as a means of escape from the rising prices. With the implementation of Markets in Crypto Assets (MiCA) legislation, the European crypto sector is now more approachable for investors.

On the other hand, the U.S. Fed yesterday announced an interest rate hike of 25bps. No decisions on future rate hikes or pauses have been taken, Fed Chairman Jerome Powell stated at his post-meeting press conference.

Moreover, he emphasized that the central bank would remain very data-reliant moving ahead. Among other things, he pointed out that the Fed would have two more data on employment and two more reports on inflation to consider before its upcoming rate-setting meeting in September.

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