Central banks around the world continue to raise interest rates due to high inflation, following the example of the United States, Britain, and other leading world economies.
The Czech central bank raised its key interest rate to 7% yesterday in an attempt to curb rising inflation in the country, DPA reports, quoted by BTA. The increase of 1.25 percentage points shot the interest rate to its highest level since the beginning of 1999, notes AP.
In May, annual inflation in the Czech Republic reached 16% amid rising fuel prices. This is the highest level of inflation in the country since 1993. The Czech Republic ranks fourth in the European Union with the highest annual inflation in May, right ahead of Bulgaria, which is in fifth place.
Yesterday, the Central Bank of Iceland also raised its key interest rate by another percentage point to a five-year high to ensure that inflation slows down within a reasonable period.
Meanwhile, in Washington, US Federal Reserve Chairman Jerome Powell stressed that the Fed is determined to reduce inflation in the United States, which has reached its highest level in 40 years. It is much higher than the 2% target set by the central bank.
In a statement to the US Senate Banking Commission, Powell said the Fed was acting “expeditiously” to achieve that goal.
However, this raises concerns among many analysts. They are worried that the way the central bank is struggling with rising prices could plunge the country’s economy into recession.
Jerome Powell himself admitted to Congress yesterday that a rapid rise in interest rates could lead to a recession, although this is not the desired effect, AFP reports.
“It’s possible,” Powell said during a Senate hearing when asked about concerns about the recessionary effects of the Fed’s monetary policy. “This is not the desired effect at all, but it is possible,” he added.
The market collapse reveals divisions in Europe
Market sales have brought back memories of the eurozone debt crisis more than a decade ago, highlighting divisions that are hampering the currency bloc’s efforts to forge closer ties.
In the years since the debt crisis, the 19 eurozone countries have centralized and tightened banking controls, but many of the planned economic reforms in Italy and other countries have been weakened as huge money prints boost the economy.
Fearing that higher borrowing costs will stifle economic growth, market turmoil has revealed cracks in the difficult union, which – unlike the US – is backed mainly by the central bank rather than a tax-levying government. and to spend.
Two events this week reveal the union’s fragility: the ECB’s efforts to restore confidence in weaker countries facing rising borrowing costs following the completion of its debt-buying program, and a decade-long failure by ministers to put savers in the bloc. on a stable basis.
After a rare extraordinary meeting on Wednesday, the ECB promised new measures to curb market sell-offs, but the lack of a concrete plan to help debt-ridden countries such as Italy and Greece has disappointed some.
This is in stark contrast to 2012 when then-ECB President Mario Draghi tackled a crisis of confidence in the future of the currency with a promise to do “what is needed”, followed by a large-scale money-printing program.
Now, however, the sharp rise in prices caused by this printing of money, as well as the sharp rise in energy costs following Russia’s invasion of Ukraine and the pandemic blockades in China, make this feat difficult to replicate.
“It was easy to do what was needed when inflation was low,” said Guntram Wolf of the Bruegel think tank, adding that rising prices would force the ECB to change course.
“The extraordinary meeting has created many expectations that the ECB ultimately cannot meet,” he said. “Only governments can deal with real economic disparities and the incomplete structure of the eurozone.”
French Finance Minister Bruno Le Mer warned against fragmentation of the bloc, a public warning that was once common but largely disappeared after the huge printing of money eased the debt crisis.
In a speech to students in London, Lagarde did not elaborate on what the ECB’s actions might look like but instead spoke about climate change and the impact of the war on world grain supplies.
Disagreements in the eurozone are likely to come to the fore during a ministerial meeting later Thursday to discuss the bloc’s plan to strengthen the bloc’s financial system.
The main pillar of the reform related to the financial crisis, the so-called banking union, continues to be mired in debate, with the critical issue of deposit protection across the region still unresolved.
“We have gone backward rather than forwards,” said Karel Lannu of the Center for European Policy Studies.
“If a bank goes bankrupt, it will be the same as in 2008,” he said, adding that the burden would be borne by individual countries, not the entire bloc. “Draghi’s period is over.”
Ministers are expected to continue postponing plans for a single safety deposit line for bank deposits, which Germany has long opposed, as it did not want to be burdened elsewhere, extending a decade-long effort to unify the sector to better oppose crises.
Thomas Huertas, a former vice-president of EU banking supervision who currently works at the Leibniz Institute, said the lack of such a safety net puts European banks at a disadvantage compared to their American competitors.
“This is one of those benefits that one can see and recognize. It is an important element not only for finances but in my opinion for the Union itself,” he added, commenting on the need for cross-border depositors’ protection.
The lack of progress in the banking union has, in turn, affected the shares of European banks, which have been lagging behind their American competitors for years.
The ministers’ debates are taking place against a backdrop of rising Italian borrowing costs, exacerbated by the ECB’s plans to raise interest rates and stop buying debt to contain rising prices. Spanish, Portuguese, and Greek bonds are under similar pressure.
Bankers and investors are watching closely how Europe reacts.
“Much of our work is about trust,” said Vis Ragavan, chief executive officer for Europe, the Middle East, and Africa and co-chair of JPMorgan’s global investment banking. “Much of what we are seeing is about trust in politics and achieving an organized way out of stagflation.”
But once the ECB has exhausted its way to delight investors, the ball is back in the court of politicians who must act.
“While the ECB could keep markets happy with bazookas, it is becoming increasingly difficult to do so at a time when it has to fight inflation,” said Carsten Brzeski, an economist at Dutch bank ING.
“This leaves it up to governments to finally find a suitable union.”
