On Thursday, the European Central Bank (ECB) will add 25 basis points to the largest rate hike in the European Monetary Union’s lifetime.
With the conclusion of its reinvestments, the greening of the ECB’s Corporate Sector Purchase Programme has come to an end. As the portfolio slowly winds down, the ECB must seek alternative ways to green it.
The European Central Bank (ECB) is expected to further raise its rate of interest. Rate hikes take a long period of time to have an impact on the rest of the economy. The Bank Lending Survey shows that credit conditions and loan demand are tightening at rates not seen since previous major crises. A credit crunch in the making should be signaling to ECB officials that it is time to wait and see, as further increasing the interest rate without knowledge of the consequences of previous increases can prove to be a major policy mistake.
Christine Lagarde has recently argued that the price stability and financial stability objectives of the European Central Bank (ECB) are not at odds with one another. While in tranquil times this assertion may be true, it does not apply in the current context. Higher rates create turmoil in the financial markets, jeopardising the financial stability objective.
With inflation reaching its highest levels since the euro was introduced, ECB officials have been wary of a wage-price spiral. Yet it’s profits, not wages, that are the real culprits in today’s inflation story.