European Central Bank Orders Second Consecutive 0.75% Rate Rise; Better News for US GDP

The European Central Bank (ECB) has raised interest rates by a record-equaling 0.75% for the second consecutive month, as its Governing Council has further ramped up the attempt to tame high inflation.

The European Central Bank’s deposit rate is now pegged at 1.5%, with the main refinancing interest rate set at 2%.

In its statement, the ECB also signaled that there are likely to be more rate hikes to come, as future decisions on the rate path will evolve around the outlook for inflation, and prices are likely to increase.

According to Eurostat data, Eurozone annual inflation surged to an all-time high of 9.9% in the eurozone during September, a month-on-month rise of 0.8%.

Many analysts predicted that there would be a 0.75% rise, with capital economics anticipating a full 1% rate increase, with more rises to come in December and early next year as part of the race to bring back interest rates towards neutral.

For the six years up to June 2022, interest rates in the eurozone were zero, and the latest move by the ECB is at an accelerated pace, but it has been less aggressive on rate raising compared to other major central banks such as the US Federal Reserve and the Bank of England.

The rate decision also shrugged off political opinion, with French President Emmanuel Macron recently expressing concern over higher rates reducing economic demand.

Lagarde Says Inflation Outlook Bleak, Euro Falls 

ECB President Christine Lagarde said after the statement was released, that inflation may turn out to even higher than the bleakest predictions.

Lagarde expected that food, energy, and commodity prices will keep inflation high in the eurozone, fanned by the unpredictability of the long-lasting war in Ukraine.

Soon after the announcement, the Euro fell against the United States Dollar, the British Pound, and the Japanese Yen.

Stock market reaction was mixed, with the German DAX climbing by 0.11%, while the French CAC 40 Index declined by 0.23%.

United States Economy Rebounds, but Recession Fears Linger 

The United States economy is estimated to have returned to growth at an annualized rate of 2.6% during the third quarter of 2022 according to the Bureau of Economic Analysis, after contracting by 0.6% and 1.6% over the previous two quarters.

While this may have staved off immediate fears of a recession, there remains concerns that a downturn is still on the way, as the hawkish monetary policy of the Federal Reserve looks set to continue.

In the short term, US job losses are widely expected to be minimal, and consumer spending be robust despite the higher cost of living.

The 2.6% annualized growth rate was less than expected by the Atlanta Federal Reserve Bank’s forecasting model, which expected a 3.1% upturn.

US Exports and Consumer Spending Increase 

The Bureau of Economic Analysis revealed that rising exports led the estimated growth, particularly through industrial supplies and materials, notably from petroleum.

Export services activity was spearheaded by the travel industry, and business services mainly in finance.

Consumer spending in services rose mainly via health care, but this was offset by a reduction in goods spending, as footfall declined for motor vehicles and parts, as well as for food and beverages.

United States Dollar Reacts Positively, Stock Markets Decline 

Despite some longer-term apprehension over the economy, the United States Dollar made immediate gains against the British Pound with the GBP/USD currency pair declining by 0.39%, while the EUR/USD currency pair fell by 0.82%.

Yet the S&P 500 Index, which has endured a difficult year, rose by 0.48% before falling to a 0.19% increase. The Nasdaq 100 Index fell by 0.31% after the advance GDP data was released.

Peter Taberner
Peter has been a UK-based freelance journalist for over 15 years, and has written for several financial publications including Funds Europe, Trade Finance Magazine, International Finance Magazine.

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