The European Central Bank is expected to raise interest rates for the first time since 2011.
In a statement, the bank said it plans to raise interest rates by 25 points on July 21, from negative 0.5 per cent to negative 0.25 per cent. The decision comes in response to inflationary pressures, which hit 8.1 per cent on a year-over-year basis in June.
The move follows significant rate hikes by central banks from Western nations outside of the E.U. During the second quarter of 2022, Australia, Canada, New Zealand, the U.K. and the U.S. all raised rates.
According to a new report on the global economy from AllianceBernstein, the banks were left with no choice but to raise interest rates. “The global economic outlook deteriorated sharply in the second quarter. Inflation remains persistent in the West, with few signs that meaningful moderation is imminent. Central bankers have had no choice but to respond with aggressively tighter monetary policy.”
While the ECB’s rate hikes may be necessary, the paper noted the European economy is weathering financial stresses caused by Russia’s invasion of Ukraine better than had been previously predicted. Despite this, AllianceBernstein said it expects more rate hikes will follow.
“The ECB will raise rates in the coming months, but we expect, over time, the growth impact of the Ukraine war, as well as the lower long-term sustainable rate of growth in Europe, to limit the scope of the tightening cycle. We expect growth will slow enough that rate cuts will be a possibility in 2023, assuming of course that inflationary pressures abate over time as we anticipate.”
It’s also very probably that Western nations will face recessions, according to the paper. While raising interest rates may be a catalyst for a global recession, it argued central banks won’t be able to effectively respond to slowing growth until inflation returns to less than two per cent.
“This outcome isn’t a certainty, the probability of meaningfully slower, or even negative growth, has increased materially in recent months as inflation has stayed high.”
The move to raise interest rates in the Eurozone comes after the release of ECB figures showing the total assets of European defined benefit and hybrid pensions declined by €131 billion during the first quarter of 2022, from €3.373 trillion to €3.223 trillion. Despite the weak performance of assets, pension plans saw their average solvency positions improve during the period, as total liabilities fell by €172 billion.