(Finance and Economics) The European Central Bank raises interest rates by 50 basis points "beyond expectations". Where will the European economy go?

  China News Agency, Beijing, July 22 (Reporter Chen Kangliang) The European Central Bank decided on the 21st local time to raise the three key interest rates in the euro zone by 50 basis points. This is the first time the European Central Bank has raised interest rates since 2011, causing widespread concern.

In this regard, many analysts believe that the European Central Bank's move may lead to increased risk of recession in Europe.

  Why did the ECB raise interest rates "beyond expectations"?

According to Cui Rong, an analyst at CITIC Securities, this is all "to blame" for inflation.

Cui Rong said that the European Central Bank raised interest rates by 50 basis points this time and exited the negative interest rate policy ahead of schedule, which exceeded market expectations and showed that the current European inflationary pressure is huge.

  Cui Rong pointed out that the European Central Bank had previously made forward-looking guidance at the June interest rate meeting, and will raise interest rates by 25 basis points at the July interest rate meeting, and then continue to raise interest rates and exit the negative interest rate policy.

However, as European inflation continued to soar as a result of the conflict between Russia and Ukraine, the European Central Bank did not act according to forward-looking guidance, but chose to raise interest rates by 50 basis points higher than expected and exit the negative interest rate policy ahead of schedule. rate hike.

  In this regard, Chen Xing, an analyst at Zhongtai Securities, said that inflation in the euro zone has continued to be high recently. The inflation rate in June was as high as 8.6% year-on-year, far exceeding the monetary policy target of the European Central Bank. The recent depreciation of the euro is more likely to lead to a significant increase in the risk of imported inflation. .

Against this background, the European Central Bank raised interest rates for the first time in 11 years.

  So, what impact will aggressive rate hikes have on the European economy?

Cui Rong believes that after the European Central Bank raises interest rates, the risk of European economic recession will further increase.

The European economic recovery process after the new crown pneumonia epidemic has been slow, and the outbreak of the Russian-Ukrainian conflict has made the European economy even worse.

Under the influence of the Russian-Ukrainian conflict, in addition to causing soaring inflation, the European energy crisis has also intensified.

Uncertainty exists in Europe's energy issues, which will constrain the European economy.

Under such circumstances, high inflation forces the European Central Bank to withdraw from the negative interest rate policy ahead of schedule, rising borrowing costs and tightening financial conditions will further slow down European demand. It is expected that the European economy may fall into recession within this year. If inflation remains high, may face stagflation.

  Jiang Fei, an analyst at Great Wall Securities, said that recently, the European Commission once again lowered its economic growth forecast and raised its inflation forecast.

The European Commission forecasts that real economic growth in the euro zone will fall to 2.6% in 2022, while inflation will rise to 7.6%.

It is worth noting that the real economic growth rate of the euro zone in 2023 has also been significantly reduced from the 2.1% forecast in June to the 1.4% forecast in July, which may indicate that the European Central Bank may adopt a more aggressive path of raising interest rates to curb inflation.

  Tao Chuan, an analyst at Soochow Securities, also said that looking forward to the second half of the year, under the risk of Russia cutting off natural gas supplies, inflation in the euro zone may face a periodic surge, and the economy may enter a recession in the fourth quarter.

  Tao Chuan believes that the conflict between Russia and Ukraine is a core external variable affecting the European economy. If Russia will cut off the supply of natural gas to Europe as a counter-sanction measure, it will lead to a new wave of rising commodity prices that have already fallen, which will not only push up inflation, but also push up prices. trigger an economic recession.

  Tao Chuan said that since April, institutions have generally lowered their forecasts for real economic growth in the euro area and raised their forecasts for inflation.

For now, although the ECB's rate hike cycle lags the Fed's, Europe could be headed into recession first, given that Europe's economic outlook is more pessimistic than the U.S.

It is worth noting that in order to save the economy, the European Central Bank may suspend interest rate hikes or adjust the rate of interest rate hikes after September.

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