The European Central Bank is set to raise interest rates for the first time in a decade. More details about the "anti-fragmentation" tool will be unveiled today.
Fears of gas supply cuts and inflation are changing the outlook for the Eurozone economy. Economic activity in Europe has also been weighed down by Russia's invasion of Ukraine, disrupted supply chains and rising energy costs, fueled by inflation.
The European continent's dependence on Russian energy imports, a backdrop of soaring inflation, has left the central bank committed to raising interest rates by at least a quarter of a point from current historic lows. Consumer prices rose 8.6% in June, a record for the eurozone and above the ECB's two percent.
Eurozone to face tough winter Europe plans to ration if Moscow cuts gas supplies. The European Commission on Wednesday put forward a plan to cut gas use by 15% to mitigate the worst impacts on the economy.
Inflation and market volatility across the Eurozone and the devaluation of the dollar are just examples of market influences. But inflation shows no signs of easing, the ECB lags behind levels in Britain and the United States, and the euro looks weaker against the dollar, putting pressure on the ECB to consider a bigger hike. Central banks typically hesitate before raising rates in the economy but now need to be prepared to think to a point where inflationary pressures push the ECB to break ground. Finding a way to balance growth and inflation risks seems like an "impossible equation to solve" for the ECB. The central bank's deposit rate has been negative for the past eight years, with the key rate currently at minus 0.5%.
Depositing money into the ECB overnight, the interest rate effectively charged by banks, is designed to encourage more lending, more economic activity, and a higher rate of inflation. ECB President Christine Lagarde said the goal is to lift interest rates out of negative territory by the end of September as part of a gradual but sustained hike. The US Federal Reserve and the Bank of England have already outpaced the ECB, starting their hiking cycles faster and raising rates more aggressively.
When the ECB last raised rates in 2011, the emergence of a European debt crisis forced the central bank to return quickly. The ECB president, Mario Draghi, now Italy's prime minister and at the center of fresh concerns about government debt, eased tensions in the bond market.
The ECB's announcement in early June that it would raise interest rates caused borrowing costs for highly indebted eurozone members like Italy to rise faster than others. To this end, the ECB said it would reinvest maturing bonds from its portfolio to lift debt from more risky countries and ease stress.
The bank also decided to design a new tool to hedge the "transmission" of monetary policy moves with targeted bond purchases. ECB policymakers will unveil more details about the "anti-fragmentation" tool today, but some governing body members have met the idea with skepticism, so it is envisaged to be used only under strict conditions.
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