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ECB Unlikely to Throw Caution to Wind on Rate Hikes Despite Record Inflation

Forex Jul 01, 2022 05:13PM ET
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© Reuters

By Yasin Ebrahim

Investing.com -- The euro slipped against the dollar Friday as investors bet that the European Central Bank is unlikely to throw caution to the wind on rate hikes despite data showing inflation swelled to a record.

EUR/USD fell 0.48% to $1.0432.

Euro area inflation rose by a record 8.6% in June, above expectations for an 8.4% rise.

But the upside surprise isn’t likely to alter the ECB’s rate hike course “as the majority on the monetary policy council seems to prefer a cautious start,” Commerzbank said in a note ahead of the data.

The European Central Bank is preparing to deliver its first rate hike in 11 years later this month, with investors betting on a 25 basis points rather than 50 basis points rate hike.

The ECB has been battling above-trend inflation, driven by a surge in energy prices, that has many concerned that a recession is more likely than not.

But ECB president Christine Lagarde downplayed these fears earlier this week at the Sintra Forum.

While acknowledging that the central bank has “markedly revised down” its forecasts for growth in the next two years, Lagarde said the ECB is “still expecting positive growth rates due to the domestic buffers against the loss of growth momentum.”

Yet many believe the central bank will have to pivot to steeper pace of hikes later this year should the eurozone experience another energy-infused upside surprise in inflation.

“If the supply of Russian natural gas to the euro area is squeezed significantly further by the time of that [September] meeting, the inflation outlook will be much darker too, perhaps prompting an even bigger rate hike then and additional aggressive tightening beyond,” Daiwa Capital Markets said in a note.

ECB Unlikely to Throw Caution to Wind on Rate Hikes Despite Record Inflation
 

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Comments (4)
Jack Peterson
Jack Peterson Jul 03, 2022 2:37PM ET
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The EU is about to collapse.. the old saying is as true today as in the past. Insanity is doing the same thing and hoping for a different result.. the EU Central Bank is in disarray with LaGarde at the helm and she prefers to do nothing…. Wake up Europe you too are being fed lies that all is well… for who? The Central Bankers?
taylor jason
taylor jason Jul 02, 2022 12:54PM ET
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ecb is in shambles, on the verge of bankruptcy. they can't even control the rate arbitrage in their own union hahahah
Jul 01, 2022 6:45PM ET
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Rates are literally at zero…
Daimon van Buren
Daimon van Buren Jul 01, 2022 6:45PM ET
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Actually -.25%, the first planned hike would only just bring them to 0%. Anyway, as an European I am just throwing money at the American market to save whatever I have of my capital. One way or another the European Union will continue its decline that already happens for decades.
Edward Chong
Edward Chong Jul 01, 2022 6:45PM ET
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Daimon van Buren yeap its pretty sad. the policy makers are really digging their own grave.
taylor jason
taylor jason Jul 01, 2022 6:45PM ET
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the problem with the ecb is that its impossible to create a monetary policy that effects all member countries the same way. Italy, Greece, Spain, and Portugal will always be a net negative while Germany continues to carry them all.
Howard Blum
Howard Blum Jul 01, 2022 6:07PM ET
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Perhaps the ECB should take note of the plunge the Japanese Yen has taken. Their central bank, much like the US Federal Reserve 18 months ago didn't raise their key internal interest rate for fear it would stifle the recovery from the impact of Covid 19. It was a bad decision, just like a decision by the ECB to slow walk rate hikes because of the situation in Ukraine will hurt the European economy even more than aggressive rate hikes.
Sandro Pop
Sandro Pop Jul 01, 2022 6:07PM ET
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True!
 
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