ECB raises rates more than expected to fight off runaway inflation

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Source: Reuters

FRANKFURT, July 21 (Reuters) - The European Central Bank raised interest rates by more than expected on Thursday, confirming that concerns about runaway inflation now trump growth considerations, even as the euro zone economy reels from the impact of Russia's war in Ukraine.

The ECB raised its benchmark deposit rate by 50 basis points to zero percent, breaking its own guidance for a 25 basis point move as it joined global peers in jacking up borrowing costs. It was the euro zone central bank's first rate hike for 11 years. Ending an eight-year experiment with negative interest rates, the ECB also increased its main refinancing rate to 0.50% and promised further rate hikes possibly as soon as its next meeting on Sept. 8.

"Further normalisation of interest rates will be appropriate," the ECB said. "The frontloading today of the exit from negative interest rates allows the Governing Council to make a transition to a meeting-by-meeting approach to interest rate decisions," the ECB said in a statement. The ECB had for weeks guided markets to expect a 25 basis point increase but sources close to the discussion said 50 basis points was put in play shortly before the meeting as indicators pointed to a further deterioration of the inflation outlook.

With inflation already approaching double-digit territory, it is now at risk of getting entrenched above the ECB's 2% target and any gas shortage over the coming winter is likely to push prices even higher, perpetuating rapid price growth. Economists polled by Reuters had predicted a 25 basis point increase but most said the bank should actually hike by 50 basis points, lifting its record-low minus 0.5% deposit rate to zero.

Read more: https://www.reuters.com/markets/europe/ecb-finally-join-rate-hike-club-with-big-move-agenda-2022-07-20/

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1. Yes, "all the way UP to zero."

Europeans were howling in rage at negative interest rates. In some banks, for a while, people with €100,000 were getting hit with negative interest rates. In other words, if you left €100,000 in your savings account, at the end of the year, you would have €99.250 or €99.000. After a wave of very vocal protests, that was raised to a minimum of €250,000, but it still encouraged many people to spread their saving around several banks to avoid the punishing.

European banks now make it very difficult to deposit or withdraw even modest amounts of cash, and even then they record everything. If you have a €200 bill and you want ten €20 bills, they take your ID and list the transaction alongside your bank account number--to combat money laundering, they government says, as if that made any sense at all. European governments take all sorts of high-publicity measures against "money laundering" except for measures that really would limit money laundering (real money launderers shoot back, private citizens wanting five €20 euro bills do not). Nonetheless, many EU citizens go through the paperwork, and prefer to use cash. European governments are drowning in their own tsunami of paperwork, recorded phone calls and information collected on private citizens anyway. The bad guys laugh all the way to their villas on the Dalmatian coast, since money laundering is not conducted with €200 bills or €500 bills or Krugerrands. It is conducted with laptops and phony taxi companies, video game parlors and pizzerias. These low key operations dutifully turn in mountains of €10, €20 and €50 bills to the bank every day, fully reported and taxed. Hardly any taxi fares rode, hardly and video games were played, and hardly any pizzas were sold, but that drug money has to go SOMEWHERE, and the governments turn a blind eye, because THOSE bad guys shoot back. The old lady selling a Krugerrand does not.

So, if the banks stop charging their customers negative interest, those customers' incentive to spread their accounts across several banks to avoid hitting the negative interest threshold is gone. They will go back to leaving their savings in one single bank account. This will be welcome news to tax authorities, who won't have to audit ten accounts per upper middle class person instead of one.