Facing headwinds and crises on all sides, the European Central Bank is likely to begin a super aggressive phase of monetary policy today, with the largest hike in the institution’s 24-year history. Most economists see a jumbo-sized 0.75 percentage point increase in the cards, after the bank raised interest rates by a half percentage point in July. That hike was its first in more than a decade (and the first since the pandemic), and highlighted how severely the ECB is behind its central bank peers.
Bigger picture: Playing catchup won’t be easy, with the eurozone staring down the barrel of a severe economic crisis. The common currency is plunging amid surging inflation- which hit a new all-time high of 9.1% in August – while a damaging recession is in the works due to an energy crisis. Things aren’t getting any better as Russia threatens to cut off all gas supplies to the “collective West” ahead of what might be a harsh winter, and retaliate if the G7 imposes a price cap on Russian oil.
“At Jackson Hole, ECB executive board member Isabel Schnabel acknowledged a trade off between taming inflation and maintaining growth,” noted Jean Boivan of BlackRock Investment Institute. “Yet she stressed a ‘robust control’ approach to monetary policy, focused on getting inflation down at whatever cost.”
Thought bubble: Many are wondering if the ECB can play catch up, or if it is caught in a Catch-22. Raise rates to stave off entrenched inflation, only to find that energy prices are keeping costs elevated and weighing on economic output. In that situation, inflation may not decline, or can at least take quite a while to decline, risking a nightmare stagflation scenario. The ECB will announces its policy decision and growth projections at 8:15 ET, followed by President Christine Lagarde’s news conference a half-hour later.
Image and article originally from seekingalpha.com. Read the original article here.