EU Central Bank and US Fed team up to raise interest rates

The European Central Bank (ECB) and the US Federal Reserve joined hands to raise the interest rate, with the aim of eradicating record inflation.

However, policymakers fear the financial measure could worsen the next European recession and overweight both creditors and the public.

The bank’s board of governors is considering raising its main benchmark for the 19 countries that are part of the euro zone, although the exact percentage remains to be discussed. Officials say it could see an increase of 0.5% or up to a record increase of 0.75%, which would be the first such measure since 2011.

Record inflation rate

The ECB did not expect a rate hike in fiscal year 2022, but now faces record inflation of 9.1%, on average, in August 2022, with some countries even managing rates of up to to 15.2%, increases driven by soaring prices. natural gas and energy, amid the ongoing Russian-Ukrainian war. Since the ECB considers an inflation rate of 2% to be the healthiest for the European economy, interest rate adjustments are necessary to combat the current global economic climate.

However, ECB President Christine Lagarde mentioned that there is no recession and neither will there be in 2023, even though most countries are facing surges in prices, inflation rates and unprecedented economic turbulence.

A higher interest rate would directly influence the cost of credit throughout the economy, making it more difficult for businesses and individuals to borrow, consume and invest and, therefore, would have an impact on the rate of economic growth.

The Federal Bank will see its interest rate increase

The ECB is falling behind other central banks that have already raised interest rates, amid global concerns.

By comparison, the Federal Bank’s benchmark for lending to banks is currently 2.25% and will rise to 2.50%, while the Bank of England’s key benchmark is now 1.75%. Price stability seems to be the common ground for all central banks facing changes in their interest rates, with the risk of higher unemployment and weaker growth.

In addition, a higher interest rate would support the euro exchange rate against the USD by increasing the demand for euro-denominated investments.

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