European Central Bank and Bank of England’s Anti-Inflation Measures Risk Recession Havoc

YEREVAN (CoinChapter.com) – European Central Bank (ECB) and the Bank of England (BOE) announced their plans for more interest rate hikes in the current year, following the US Federal Reserve’s analogous decision. However, while the Fed implemented a 25 bps hike, ECB opted for a 50 bps increase, eyeing another 50 bps move in March.

The Federal Open Market Committee (FOMC) meeting minutes testified to the Fed’s intention to raise interest rates as high as 6%. Meanwhile, the ECB sets the target at 4% and the BOE to possibly 5%, should the global economy “continue to be resilient and inflation run rife.”

Here are more details.

ECB Intends to Fight Scary Inflation

According to statistics from Eurostat, annual inflation in the Euro-region ranged from 5.8% in Luxemburg to 26.2% in Hungary. As a result, the mean EU inflation stood at 10% in Jan 2023, while the US inflation came in at 6.4% in the same period.

Moreover, recent comments by the Eurozone policymakers suggest that the ECB may act forcefully.

The central bank currently projects inflation to average 6.3% in 2023, meaning its real policy rate is deeply negative, which, in turn, means the inflation rate is much higher than the nominal interest rate. That underscores why many ECB officials reckon the benchmark isn’t restrictive yet.

Also read: FOMC meeting minutes released – what to expect from Bitcoin?

An inflation increase beyond expectations will likely evoke a wave of hawkish interest rate hikes from any central bank. As a result, the central bank makes borrowing money more expensive, slows down the economy, and, in turn, boosts the currency’s purchasing power. 

However, a slower economy and interest rate hikes also threaten the market with a recession, a global concern for months.

In its statement in February, ECB pledged to “stay the course in raising interest rates significantly at a steady pace” and — in unusually strong language — said it intended to hike by another 50 basis points in March. Thus, the statement exacerbated recession fears, mirroring the BOE stance.

BOE Focuses on Recession Woes

A senior Bank of England policymaker hinted that investors could expect more interest rate hikes from BOE this year in early February. Catherine Mann, an independent economist on the bank’s rate-setting monetary policy committee (MPC), agreed.

She asserted there were “material upside risks” to inflation sticking at higher levels than expected as the impact of the Covid pandemic, Russia’s war in Ukraine, and Brexit weigh on the region. “The UK suffers not only from the Covid and energy shocks but also the negative supply shock – the ‘worst of all worlds,’” she said.

Notably, The Consumer Prices Index (CPI) in the UK rose by 10.1% from 12 months to January 2023, down from 10.5% in December 2022.

However, recent comments suggest policymakers are wary of taking interest rates too high, staving off recession fears. BOE Governor Andrew Bailey’s remarks suggest that the central bank may make peace with a peak rate of 4.50%.

I’m not saying that this is it, we’re done, because the world is too uncertain at the moment. There is an encouraging downward path of inflation in our central projection, but there’s a big risk. We’ve got the biggest risk in our forecast on inflation on the upside than we’ve ever had.

noted Bailey.

He also noted that BOE raised interest rates substantially in the last 12 months. “We expect quite a bit of the effect of that is still to come through, so we want to see the evidence of that.” said the policymaker.

Also read: Russia Quits Nuclear Arms Control Treaty with United States.

Federal Reserve hawkish as inflation persists

Across the pond, in the US, officials at the FOMC meeting generally agreed that the hawkish policies will continue “unless inflation is on a sustained downward path to 2%.” However, the latest meeting minutes showed that most Federal Reserve officials agreed to slow the pace of interest rate increases to a quarter of a percentage point.

Greg McBride, the Senior Vice President & Chief Financial Analyst at Bankrate, told CoinChapter that he expected more hawkish policies to come, according to “recent comments from 2 FOMC members about having favored a larger 50bp hike at the February meeting.”

Though the minutes won’t reveal explicit plans on how many more Fed hikes the members see as necessary, we may get a sense from the deliberations as to what to expect when the Fed releases their Summary of Economic Projections at next month’s meeting.

said McBride.

Considering the ECB, BOE, and Fed’s determination to fight rising inflation, traders should consider recession fears before making an investment decision.