The ECB’s rate hike comes as a shock, but it could be the first of many

If something can’t go on forever, it has to stop. As logical as that may be, the end of the easy money era will come as a shock to many.

The European Central Bank’s half-a-point rate hike across the eurozone is an attempt to curb runaway inflation.

It’s a stock economic reflex. However, the pain for those already in the eye of a perfect cost-of-living storm will be no less acute.

A rise had been expected, but up until this week it was thought to be no more than 0.25 percent. No wonder, then, that the end of Europe’s eight-year experiment with negative interest rates was such a jolt.

In a statement, the ECB said: “Today’s frontloading of the exit from negative interest rates allows the Governing Council to move to a session-by-session approach to rate decisions.”

It is therefore very likely that further increases will follow.

This is particularly difficult for Ireland, where inflation is at 9.1 percent.

Banks are unlikely to waste much time here before they start raising rates too. Already, our rates are among the highest in the eurozone,

It is also quite clear that the undercurrents affecting many people’s lives will make it very difficult to absorb further financial strains.

For example, Irish households are already mired in the biggest cost-of-living crisis in nearly four decades. Figures from the Central Statistics Office show that prices here rose 9.1 percent in the 12 months to June.

The higher cost of living was mainly caused by higher energy, fuel and food bills. Electricity, gas and other fuels increased in price by 22.5 percent year-on-year. The motivation behind the increases is to introduce a chilling effect on borrowing that ultimately reduces spending.

The ECB may not have had a choice, but a rate hike is a blunt instrument, especially when so many other shocks have to be dealt with by budgets.

Former US President Bill Clinton once said, “You know what higher interest rates mean? For you, it means a higher mortgage payment, a higher car payment, a higher credit card payment. What this means for our economy is that business people will not borrow as much money, invest as much money, create as many new jobs, create as much wealth, or muster as many raises.”

ECB President Christine Lagarde said yesterday: “The most valuable asset we can – and must – deliver is bringing inflation down to 2 percent over the medium term.” One wonders whether it is in the ECB’s gift to deliver such a thing to achieve goal.

Factors like the war in Ukraine and the supply chain disruption caused by Covid are outside his scope. Tánaiste Leo Varadkar recently raised his eyebrows when he said: “Many people’s incomes are not going to increase as fast as the cost of living, and for them it will feel like a recession”.

This feeling can only have intensified after the move by the ECB in Frankfurt. The ECB’s rate hike comes as a shock, but it could be the first of many

Fry Electronics Team

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